HOW TO... invest with success

1

MAP IT OUT

Think carefully before you invest about what you are trying to achieve and by when. This can be more than about money itself. It is about having a plan for life, with definable short, medium and longer-term goals. As a rule of thumb, money earmarked for use within five years is best left in cash (preferably Isas), national savings certificates or premium bonds.

2 SPREAD YOUR CASH TO CUT THE RISK

Broadly, there are four main asset

classes – equities, bonds, property and cash. Within each, there are sub-asset classes (i.e equities can be categorised into geographical regions or by industry sectors). Diversification is simply about not putting all your eggs in one basket. History has shown time and again it is impossible to predict with any certainty which asset class is likely to outperform in a given period. So it is important to be diversified properly, and essentially have a foot in every camp.

3 DON’T TRY TO TIME THE MARKET

Buying and selling in and out of the market in an attempt to improve returns can wipe out your capital. A recent study by Dimensional showed that £1,000 invested in the FTSE Allshare

Index since 1986 would have increased in value to £14,989 by the end of 2014. However, if you had dipped in and out of the market and missed the best 15 days in those 29 years, you’d have only got £6,340. The point is that no one could have predicted in advance when those 15 days would occur. It’s time in the market that counts, not timing the market.

4

KEEP IT BALANCED

Rebalancing a portfolio is a proven way of increasing long-term returns without a corresponding increase in risk. Take, as a simplified

example, a portfolio split 70 per cent in equities and 30 per cent in bonds. A year later, if equities have outperformed bonds, then the percentage represented by equities must be higher – let’s say it is now 75 per cent. Rebalancing in this case would mean selling sufficient equities and buying bonds to restore the original 70/30 split. This does two things – it ensures that you are not taking more, or indeed less risk than you originally intended. Secondly, it will normally mean capturing profit whilst it is available. This process is called rebalancing and many studies

show that it improves performance over time.

5 THERE IS NO INVESTMENT RISK

In a broadly diversified portfolio there is no investment risk, just volatility. At first this sounds like a ludicrous statement but it is true. Of course, in a portfolio containing equities, investments will go up and down all the time, but this is just volatility. It only becomes a loss or a “risk” if you are forced to sell assets whilst they are suppressed. The trick is not to panic when the media is full of doom and gloom, or to get greedy when times are good. Ignore the noise and carry on regardless!

Bill Saunders is head of financial planning at Acumen Financia