Principles of investing

The world of investing can seem complex. Investors today face often-changing market conditions and an endless supply of market news and many investment choices. With markets moving faster than ever before, it can be hard to know where to focus your attention.

Different types of investments are usually put in categories, known as asset classes. Generally, it is a good idea to have a mix of different types of investments from different places. Below are 6 fundamental Principles of Investing.

1. Have a plan and stick to it

It is one thing to have a target, but a sound financial plan can be the difference between simply hoping for the best and actually achieving your goals. You can review your plan regularly with your financial adviser and make adjustments when necessary, but staying focused on your plan will help you to not be distracted by short-term market uncertainty.

2. Think twice before putting your money in cash

Putting your money in cash can seem appealing as a safe and secure option but inflation is likely to eat away at your savings. For most people with longer-term investment plans, cash needs to be supplemented with investment in other asset classes that can beat the perils of inflation and offer better capital growth potential.

3. Diversify and always consider your investments as a whole

When markets are fluctuating, it is all too easy to worry about the performance of certain investment while forgetting about the bigger picture. But when one asset class is performing poorly, other may be flourishing in the same market conditions. A diversified portfolio, including a range of different assets, can help to iron out the ups and downs and avoid exposing your portfolio to undue risk.

4. Start investing early if you can

As a general rule, the earlier in life you start investing, the better your chances go long-term growth. Compound growth, the ability to grow an investment by reinvesting the earnings, is a powerful force but it takes time to deliver. The right time to invest is when you and your financial adviser have formulated a clear financial plan that requires growth.

5. Do not panic and abandon your plans

Many people suffer from what behaviourists call ‘activity bias’: the urge to ‘just do something’ in a crisis, whether the action will be helpful or not. When investments are falling in value, it can be tempting to abandon your plans and sell them, but this can be damaging because you will not be able to benefit from any recovery in prices. Markets go through cycles, and it is important to accept that there will be good and bad years. Short-term dips in the market tend to be smoothed out over the long term, increasing the potential for healthy returns.

6. A plan that is tailored specifically for you

Every single investor will have different needs and while the points above are good general tips, there is no substitute for a plan that is tailored specifically for you. What is more, in volatile times, professional financial advice can help you take the emotion out of investing and provide an objective view. It may just be the best investment you ever make.