Beyond buy low, sell high, few of us could think of an established investing rule. Here are our golden rules for investing safely and hopefully, successfully.
Investing is putting your hard earned cash into investments that can grow faster over the long term than the interest you can receive from your bank or building society, in a way that you are comfortable with. It isn’t a crazy casino.
Investing for your own future has little to do with what you will see in films like the Big Short, or heaven forbid, the Wolf of Wall Street. It doesn’t need to be complicated, exciting or too taxing either.
Our golden rules for investing in investment funds are not exhaustive, but should help you to spot funds to walk away from and protect your capital because they’re not right for you.
The worse kind of financial plan, is no plan at all.
Before you start, you need to have a financial plan so that you’re clear why you are investing, how much you are investing, what your risk profile is and that the rest of your finances are protected.
If you are new to financial planning, you can read more about this by clicking here.
You are also going to need to be patient
Investing is a long term activity, partly because you are going to see some market slumps over time.
For example, the FTSE fell rapidly after the UK EU Referendum. If you were due to take your investments out for your retirement at the end of June, they would have been worth considerably less than a few months previously. If you took them out a few months after the EU referendum, then they were higher than even a year ago.
Remember, past performance should not be taken as a guide to future returns and whether you are investing in active or passive funds, you may get back less than you invested.
Don’t invest in what you don’t understand
You will be angry with yourself and lose confidence if you lose money on something you can’t later explain as to why. The most successful fund managers invest in what they know, and when they don’t know, they research it.
Always do your own research to understand what type of assets your selected funds invest in, their strategy and the outcome they are aiming for.
Diversify your holdings
Spreading your investment across different funds will help to cover most eventualities. Spread your money over a range of different funds that invest in different asset classes, geographies and strategies. Allocate part of your portfolio for growth with a slightly higher risk and some in lower risk assets with less growth. Keep some cash in your savings for a rainy day.
Know the fund’s aims
You wouldn’t buy anything from a shop that doesn’t represent good value, the same applies to your investments. Fund managers decide whether the valuation of an asset is cheap, too expensive or just about right for their fund based on an assessment of whether it will grow, generate quality cash flow and its risk.
There are many different investment aims, here are the most common:
Capital protection funds aim to provide a set return of capital back (either explicitly protected or via an investment strategy probable to achieve this) with the potential for some investment return.
Target income funds aim to generate an income stream by investing in assets that offer dividends or interest payments. They typically hold bonds, shares or real estate or a combination of these, they are called multi asset funds. ‘Equity income funds’ select companies that pay good dividends.
Growth funds use a diversified portfolio that select assets where the underlying asset will grow, with less emphasis on the recurring revenue of dividends or interest payments. That is mainly shares in high growth companies that reinvest their earnings into expansion, acquisitions and/or research and development.
Absolute Return funds aim to deliver returns in any market condition, typically within a three year time frame. Returns are not guaranteed, but aim to achieve the greatest return for higher fees. These funds are not for widows and orphans.
Know how markets act
The value of investment funds’ underlying assets is based on what they expect the outcome of future events to be, like profit announcements. Share and bond prices can fall on good news and rise on bad, as the market has already considered information in the valuation.
Active fund managers buy, or sell a shares or bonds, because they believe they have knowledge the market may not have thought about. They may believe it is going to pay a good dividend or is in some way undervalued. Tracker funds follow an index, like the FTSE 100 and select assets that represent that index. You can read more about the difference of active and tracker funds by clicking here.
Big falls and rises show that market is being efficient, but either way, you must give it time to find its feet and move to a sustainable level.
The value of the fund is based net asset value (NAV). NAV is the total value of all the assets held by the fund, less any liabilities. Most mutual funds use the NAV to establish what the cost of buying a share, or unit, in the fund will be.
A fund’s value is generally calculated at the end of each day, as the underlying assets that make up the NAV will change throughout the day. That’s when they set the price for you to buy and sell units in the fund.
Know what really matters
You can lose a lot of money thinking of investments as betting. Following famous fund managers with lots of news, that appear to have been hyped can increase your risk more. The best returns over the long run can mean buying funds that are being ignored – providing the valuation is right, not what everyone is talking about.
Although past performance should not be taken as a guide to future returns, it will have a bearing on your fund choice. Looking at just one piece of information in isolation only tells a small portion of the story. The best possible picture of a fund’s performance needs multiple data points.
There are three areas of performance to review
- Performance over a 1 year, 3 year and 5 year period
- How the fund has performed according to its chosen benchmark
- Performance against its peers.
Focus on long term results for long term investing, keeping in mind that even the best performing funds have bad years from time to time.
If you would like to get to grips with investing in funds, our advisers can help you. Even if you don’t need to make any immediate changes to your assets, contact us today for an initial consultation.
Past performance should not be taken as a guide to future returns and whether you are investing in active or passive funds, you may get back less than you invested.