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At Wow, we work with people every day to help them become smarter investors. Here are our top 20 tips that will hopefully help you become one too:
1) Start Now – If you haven’t started yet, then better late than never. And what better time to start! The effect of time is hugely beneficial through the power of compounding.
2) Choose an investment period for each pool of money – you need to decide how long your time frame is for each pool of money – i.e. is it for retirement or for a deposit on a house? This decision is very important in working out the best investment strategy.
3) The mix of investments is crucial – it is the mix of things you invest in that will ultimately drive the performance of your investments. Messing about with the mix or trying to pick market-beating products or managers will add little.
4) Use simple rules of thumb for deciding your investment mix – for example, one idea is to own your age in bonds and have the rest in equities. Another is to own 4% in equities for each year until you need the money – and have the rest in bonds. There is no need to over-complicate things!
5) Be conservative with your estimates of future returns – it is better to be prudent than overly optimistic. If you pay in more and expect less, most of the surprises will be on the upside!
6) Diversify using funds or baskets of investments – holding shares spread over 10 companies is far less risky than only holding one share in one company (which is a very high risk, almost fool-hardy strategy). By accessing the widest possible range of investments by using unit trusts or OEICS (for example) you are managing risk. There are some tax benefits to this too.
7) Don’t try to beat the market – switching in and out of investments hoping to catch “the next big thing” rarely works – and it can be very costly. You are likely to be far more successful defining a strategy and sticking to it over the long term.
8) Own the broad equity market – ensure your equity funds reflect the broad base of companies that make up the market as a whole and not just one or two sectors or only the larger companies in the FTSE 100, for example.
9) Own high quality domestic bonds – when owning bond investments (and most people should do) select high quality bonds. Investment grade corporate bonds or government backed “Gilts” tend to be of the highest quality.
10) Reduce costs at all times – the costs of funds can be rather hard to understand – but ignore this at your peril as high costs can erode performance. Pay attention to the “total expense ratio” of funds – not just the headline “annual management charge”.
11) Don’t buy products you don’t understand – if products are confusing or opaque, avoid them. If it is not easy to understand then don’t invest in it.
12) Beat the taxman (legally) – Get this right and you could be 18% - 40% better off just by making use of all available tax wrappers and incentives. Get it wrong and your returns could be severely depressed by tax liabilities.
13) Contribute enough – don’t assume just because you put £200 a month into a pension you will have a rosy retirement, as you won’t! One simple rule of thumb for retirement saving is to invest a percentage of salary equal to half your age into your retirement pot (which may or may not be a pension plan). Alternatively, save £1 in every £6 of income earned from an early age and you will probably be OK. If not, expect a quiet retirement!
14) Pay attention to your life-cycle – this means your investment mix at age 35 should really be different to your investment mix at 55 when it comes to retirement investing. Consider moving more money into lower risk investments as you approach retirement.
15) Don’t run out of cash – when you need to start taking income from your investments, make sure you do not run out of money before you die. A simple rule of thumb is to take 4%. Taking more than this could eat into capital and less than this will almost certainly mean you will not run out of money. This can also help work out the amount of capital you need. For an income of £40,000 now, you would need a fund worth £1 million to provide this.
16) Maintain the mix – monitor your investments regularly (but not daily). You need to make sure the investment mix is still right and then re-balance if required. If you select the right investment products or funds, then this can be done automatically for you.
17) Stick to the plan – buying high and selling low is the worst thing you can do when investing – but for some bizarre reason it seems to be the most popular strategy for most people! Markets will go up and down and sometimes it can be a bumpy ride, but if you are prepared for this and understand how they work, you will be less prone to the usual emotional excesses.
18) Don’t look at your investments too often – have a proper review once a year. Anything more than this can lead to a short-term outlook and you might get jumpy about short term fluctuations.
19) Avoid the noise – most of the time what is written in the media about the markets is nonsense and fluff – interesting but unimportant. Much of it is telling you to be happy or distraught at precisely the wrong time! Often it is telling you to covet investments that have already gone up in price – which is a bizarre emotion. And remember, if something sounds too good to be true, then it definitely is.
20) Pay for truly independent advice – You are probably thinking we are bound to say this! Well the truth is even if it is not us you should get independent advice to help you with your investment planning. At a basic level, good advice now could save thousands in investment charges and tax later on – which will more than cover the cost of advice. Slightly more important however is having someone help you to answer the question “Will I be able to do everything I want to do in life”? What price being able to answer this question! Avoid advisers who pretend to offer advice for free – this will almost certainly cost you more in charges and commission in the long run.
Please be aware....
When investing, the value of your investment and the income from it can fall as well as rise and is not guaranteed - you may not get back the full amount invested. The past is not necessarily a guide to future performance and any tax rules may change in the future. You probably knew this stuff anyway, but just in case....