2019 was a rewarding year for most investors. However, there were still a number of challenges, including the ongoing uncertainty created by Brexit, a UK general election, trade wars between the US and China and the fallout from the collapse of Woodford Investment Management, which may have dented the confidence of many investors.
It is likely that we will have challenging times in the coming year and beyond. Investors, therefore, need to stay calm and rational and adopt a long-term approach. Patrick Connolly, Chartered Financial Planner at Chase de Vere, has listed a dozen New Year’s Resolutions for investors to heed in 2020.
Understand what you want to achieve
As a starting point you need to decide what you want to achieve, how long you are planning to invest and how much risk you are prepared to take. This will help you decide the most appropriate investments for you.
Sticking with cash
If you are investing over a short time period, certainly less than five years, then you should stick with cash, even though interest rates are currently at very low levels. This is because if you invest in the stock market and it falls in value, you will have very little time to claw back any losses.
Think about investment risk
When people are younger and have less money, their focus should be on capital growth rather than capital protection. There is a strong argument for these people to hold more of their investments in shares. However, as they acquire more wealth their focus should be on capital protection as well as capital growth and maybe income. These people shouldn’t take excessive risks because if they lose a significant amount of their money they might not have time to claw it back before they need it.
Diversification is key
Nobody can predict the future and so make sure that you spread risks and you aren’t too reliant on one asset class, sector, investment company or fund manager. This way, if you make a bad decision, which you inevitably will at some point, or if some of your investments are performing badly, this shouldn’t impact too severely on your overall finances.
It’s not about picking funds
The investment industry focuses too much on picking individual investment funds. It’s far more important for investors to make sure they have a sensible asset allocation strategy, which is the blend of different types of investments they hold, to meet their requirement, objectives and attitude to risk. You should never pick funds in isolation without considering how they fit into your overall portfolio.
Invest tax efficiency
You should look to invest tax efficiently and for most people this will mean using ISA and pension wrappers. Pensions give initial tax benefits but are inflexible for younger people whereas ISAs can also be tax efficient and, with stocks and shares ISAs, you can access your money whenever you want.
Look out for high charges
Investment charges have become far more transparent, whether that is the cost of funds, investment platforms or financial advice, and so it’s much easier to see how much you’re paying and to whom. We’ve seen the charges on passive investment funds, such as trackers, come down significantly but the same isn’t true of active funds where many still charge too much and deliver too little. The cheapest isn’t necessarily the best, but you need to make sure that you’re getting good value.
Consider making regular premiums
If you are starting out or don’t have large lump sums available, then look to invest regular premiums on a monthly basis. This is particularly well suited to people investing in workplace pension schemes. By investing regular premiums, you negate the risk of market timing because if the stock market goes down you simply buy at a cheaper price the following month.
Don’t make decisions based solely on past performance
Don’t get swayed by investments just because they are at the top of the performance tables. Strong recent performance should be seen as a warning sign rather than as an opportunity to buy, as investment gains have already been made and so you risk jumping in at the top of the market.
Review your investments regularly
Review your investments every six months to make sure you that they are performing in line with your expectations. If your investments aren’t performing as you expected, then try and understand why before making any changes. You don’t want to sell an investment just before its performance improves.
Consider taking financial advice
Not everybody needs professional financial advice. However, if you’re not sure what you’re doing and you will be relying on your investments, especially if you have larger amounts of savings and investments or higher earnings, then you can benefit from taking independent financial advice.
Think long term and stay calm
Investing is not like saving money in a building society savings account. You are taking more risk in the hope of getting better returns. You need to understand that there will be periods when some of your investments are likely to perform poorly. When this happens it’s important not to make rash decisions. Those who stay calm and adopt a long term approach are more likely to be successful investors.