What are the six golden rules of Investing?
Here are the key principles:
- For anyone to invest, you really should have time on your side. If you don’t have a horizon of, say, five years, it’s very difficult to be invested in real assets and not face some pretty serious risks of loss, if money is needed urgently when markets are low.
- Have an appropriate amount of money in cash. We would recommend setting aside an amount for planned expenditure and to cover an emergency fund equivalent of say 6 months net income.
- Ensure that your investments are really geared towards beating inflation over the longer term. What kind of things can we do to beat inflation? Well, the obvious one is to be invested in anything that tends to get better returns than inflation itself. The FTSE All-Share Index returned something like 390% over the 20 years to the end of last year - 2008. During that same 20-year period, inflation increased by 93% and the typical bank or building society return was only 96%. So it’s important to get inflation-busting assets into your portfolio.
- Diversify, then diversify again, then diversify again. And I don’t just mean investing into shares. Have a look at bonds, gilts, property and alternative assets like hedge funds, structured products and commodities. There’s plenty of opportunity to diversify across markets, asset classes and even by manager. Diversification is absolutely critical to maximise return and reduce risk.
- Don’t try to time the markets is the advice we give anyone that will listen because it’s such a temptation, especially for amateur investors. Investors who don’t know what they’re doing buy at the top and sell at the bottom and are so disgusted by the experience that they miss the rallies. All the evidence shows that missing just a few key days can destroy returns. We regard market timing as GAMBLING not investing.
- Don’t to be seduced by short-term performance. It’s terribly exciting when there’s a hot fund and some really exciting past performance and that is certainly the trap that most amateur investors fall into. There’s plenty of quality analysis produced by the likes of OBSR, Standard and Poor’s and City-wire that you can use to get the real story with what’s going on inside a fund and so it is important to “look under the bonnet” before you buy the car.