The nine rules all investors should follow
Collapsing markets, bank sell-offs, mergers, then some recovery and finally the USA's Federal Reserve talking about a rescue plan, have all contributed to what might be called an ‘interesting' week.
Many of those I talk to are simply bewildered and, like the proverbial rabbit caught in the headlights, find themselves unable to make a move in any direction.
But perhaps this should be seen as a useful opportunity to look at the glass and realise that it is half full, rather than half empty. Take a minute or two to think about why we choose to invest our hard-earned cash and whether there are any rules, as such, that might help.
One of the major problems is that, in the past, a crash has prompted investors to rush into cash to protect themselves. But this time it is those very bastions of risk mitigation that have left us wondering what to do.
So why do we invest? To make money of course — and the quicker the better.
And it is the latter desire on this occasion that has caught us out. Need an example? The whole world here appeared to dive into residential property as the market started rising and then rising more quickly.
Investors could not wait to get in and failed to notice the market slowing even before the current, financial difficulties.
The result is that they are now faced with propping up the mortgage on a property that has fallen in value. These are the very same investors who tended not to be in stocks, for the very reason that they thought property was the better bet. Now they are in a quandary.
There are, however, some basic rules, a sort of commandments for investing:
- Do not put all your eggs in one basket.
- Recognise that past performance is no guide to future performance.
- Do not be so exuberant that you forget that eggs drop, cookies crumble, bubbles burst and that that which goes up will eventually come down — even property.
- Do not invest in anything that you do not fully understand — especially if it sounds too good to be true.
- Do not take any investment risk that you will lose sleep over.
- Remember that if you constantly change funds it will cost you and reduce your returns in the long run.
- Remember that despite all the modern investment techniques, doing a proper asset allocation exercise will increase your chances of success over the long term.
- Remember that if you do not save on a regular basis, then maintaining your current lifestyle at the point when you decide to stop full time employment, will be difficult and not likely to support three holidays per year, two cars and all the local jollifications that you currently take for granted.
- And lastly — make a plan. More specifically, calculate that vital ‘target' amount — the amount that you think will enable you to maintain your current standard of living.
We may be in the midst of chaos and turmoil but, as I said at the outset, this could also be seen as an opportunity to put our own investment house in order whilst the powers that be try to resolve the problems of the financial system as a whole.
Nicholas Watts is an independent financial adviser with Positive Solutions Financial Services which is regulated by the Financial Services Authority. To contact him, use the website www.realwealthmanagers.co.uk