Invest for the long term
‘Our favourite holding period is forever.’ Warren Buffett (American investor and philanthropist).
An investor who puts money aside over the long term for the proverbial rainy day is far more likely to achieve his or her goals than someone looking to ‘play the market’ in search of a quick profit.
The longer you invest, the bigger the potential effect of compound performance on the original value of your investment. Many investors will be familiar with the term ‘compounding’ from owning cash savings accounts. The term refers to the process whereby interest on your money is added to the original principal amount and then, in turn, earns interest. Over time compounding can make a huge difference. The same can be true of investment returns, so long as you reinvest the income that you receive.
Whatever investment approach you choose, it is important not to overpay for the sustainability of a company’s returns or its prospects for future growth. In our opinion, following a bottom-up strategy (where individual companies are judged on their own merit and not in relation to sectors or economic conditions) with a disciplined approach based on company fundamentals to identify the right stocks for your portfolio, is an excellent way to invest. It is then a case of waiting patiently for the right opportunity. We believe that putting your money into a good stock at a reasonable price can often be better than investing in a reasonable stock at a good price.
Focus on the real rate of return
Inflation, taxation and charges (such as dealing, switching and ongoing charges) are three of the factors that can affect the real rate of return on your investment. There are certain options available that can reduce costs, including the use of tax-efficient wrappers, namely Individual Savings Accounts (ISAs), pension plans and employment ‘save as you earn’ schemes. There are also inflation-protected instruments, such as index-linked bonds (interest-bearing loans where both the value of the loan and the interest payments are related to a specific price index - often the Retail Prices Index), National Savings investments or commercial property holdings, where rents can often be increased in line with the rate of inflation.
Spread your risk
Holding a portfolio of investments with a low level of correlation can help to diversify the perils associated with investing in individual assets and markets, as well as less visible hazards such as inflation risk, the possibility that the value of assets will be adversely affected by an increase in the rate of inflation. Shares, bonds, property and cash react differently in varying conditions and opting for more than one asset class can help to ensure your investments won’t all rise or fall in value at the same time.
Geographical exposure and long-term investing are other ways of spreading risk. Investing in vehicles such as OEICs can also remove a lot of the difficulty associated with managing a broad portfolio. Above all, investors should aim for a level of risk they are comfortable with, and that reflects their investment objectives.
Don’t go with the flow
‘The time of maximum pessimism is the best time to buy and the time of maximum optimism is the best time to sell.’ Sir John Templeton (investor and mutual fund pioneer, 1912-2008).
As we saw to great effect in 2008, following the collapse of US investment bank Lehman Brothers, and at times in 2012, unexpected or adverse newsflow can have a significant effect on stockmarket performance.
While it is impossible to predict when or how the sovereign debt crisis in Europe will end, the current economic turmoil may well present opportunities for investors willing to retain their exposure to risk. Indeed, there have been times when highly cash-generative, defensive businesses capable of creating value in a range of market conditions have been hit by the same negative sentiment that has driven down the price of stocks more sensitive to economic cycles and those that are poorer quality.
Invest in what you understand
‘An investment in knowledge pays the best interest.’ Benjamin Franklin (one of the Founding Fathers of the United States of America, 1706-1790).
While a well constructed portfolio can produce a healthy return for investors, the converse is also true. It is easy to incur permanent losses by putting money into an asset that behaves in an unexpected way. Investors should always set aside time to try and understand what it is they want to hold.
‘The four most dangerous words in investing are “This time it’s different.”’ Sir John Templeton.
History is no indication of how an investment might act in the future and investors should always try to weigh the potential risks associated with a particular investment alongside the prospective rewards.
Please note that past performance is not a guide to future performance. Prices and the level of income produced by an investment may fluctuate and investors may not get back their original investment. The value of overseas investments may be affected by currency exchange rates. The views expressed in this document should not be taken as a recommendation, advice or forecast. We are unable to give financial advice. If you are unsure about the suitability of any investment, speak to a Financial Advis