Investing is simple, not easy. That’s because, in one sense, it’s just about putting your money to work in the markets and choosing long-term assets to meet your needs.
But when it comes to applying that straightforward process to our actual human lives, all sorts of curveballs get thrown in.
Our individual personal circumstances mean what’s right for you might not be right for someone else but there are some things we should all keep in mind no matter what.
That’s why we’ve developed our own set of investment principles, to either help you get started the right way, or to serve as a reminder of the basics and keep you on track.
1. Get rid of debt
You might have read us rabbiting on about the glorious snowball effect of compounding interest.
When it’s working in your favour it’s a sight to behold the longer you give your investments to grow.
But when it’s against you it can be incredibly damaging, increasing the amount you owe more and more.
So before you begin investing, try your best to pay off any expensive unsecured debt you have (we’re talking credit card bills and the like) or loans with high interest rates.
You want to give your money the best chance of working for you, not against you.
2. Keep cash on hand, just in case
If you’re fully invested and the boiler blows up you might be forced to sell your assets to cover the cost.
That unpredictability can mean you have to sell at a loss or just when you didn’t want to.
So make sure you have a safety net in place to help cover any unexpected emergency costs, so you can leave your invested money where it is.
Some people prefer to build up an easily accessible pot equal to three or six months’ salary.
This can be extremely helpful, especially if you find yourself in prolonged periods of lower earnings. 2020 showed how possible that can be.
3. DIY where you can but get advice if you need it
There’s a wealth of information on freetrade.io and further afield online to help you get to grips with your investments and plan for the long term.
A lot of investors find learning the basics and keeping up to date with the world around them and the assets they hold is enough to steer them in the right direction.
But sometimes there are complicated situations like inheritances or tax planning, where financial advice can help.
So look for guidance in the first instance but think about going to an authorised financial adviser if you feel the need.
4. Get obsessed with your pension
Unlike the Boomers and Gen X crowd, most of the newest generations of investors won’t have a gold-plated salary-for-life pension baked into their contracts.
That means it’s up to us to build up our pensions now, to give ourselves the retirement we want later.
Make sure you take full advantage of any contributions to your pension made by your employer.
In most cases you’ll be opted in too but if you paid a bit more in, would they match it? It’s worth checking.
Guide: How much do I need to retire?
5. Decide on your goals, choose assets to match
The first few points have been about getting ready, this one’s about getting started.
And sometimes people think that’s when you dive straight into share prices and analysing balance sheets.
But before that you need to define your goals - only then will you see which assets might be appropriate for you.
So, decide clearly on what those goals are, how long you are willing to give to reach them, and how bumpy a road you are prepared to put up with along the way.
Quite often there’s a compromise in there somewhere.
That’ll help show you if you need to be more realistic about your goal, or the timeframe, or the risk and volatility you are willing to accept.
Then it’s a case of applying that to your assets.
Does that mean 100% equities, or maybe a 60/40 equity-bond split? It might mean something else entirely.
There are loads of calculators and questionnaires online to give you an idea of how your choices can be reflected in the assets you hold.
It’s worth remembering that the initial make-up of the assets in your portfolio is the biggest determining factor in where your portfolio will eventually end up.
(Shout out to Gary Brinson for that cornerstone of investment research.)
So set the course that’s right for you, get the assets to suit, and set sail.
6. Get tax efficient
If you want to be the most tax efficient you can be (and you do), ISAs and pensions are there to help.
They’re often called tax wrappers because that’s all they are - the outer shell. You still need to choose the investments to go inside them.
If you plan on needing the money before the age of 55, ISAs can be useful as you can put money in and take it out whenever you like.
For long-term savings you want to access after that age, the inability to touch your money and the tax relief (government top-ups) you receive along the way can make pensions attractive.
It’s pretty much always a good idea to look to your tax efficient accounts first, before you look into other general investment accounts (GIA) which carry no tax efficiencies.
But if you fill up your ISA and still have more to invest, a GIA can scoop up the rest.
Keep in mind your eligibility to invest in an ISA or self-invested personal pension (SIPP) and the value of any tax benefits depends on your personal circumstances.
All tax rules may change in future and withdrawals from a pension product will not be possible until you reach the age of 55. So choose wisely.
7. Active or passive - which one works for you?
If you’re new to the investing world, get ready for this debate to crop up relentlessly.
‘Active’ means having a human (either you or a fund manager) sorting between individual assets and trying to populate a portfolio with what will hopefully be the market’s winners.
‘Passive’ options like index-tracking funds and a lot of ETFs are different.
These are human-less options that don’t try to beat the market, they just try to match it.
Active approaches often carry higher costs where fund managers are concerned.
You’re paying for their expertise and the research conducted by the analyst teams behind them.
Passive options are normally cheaper because they don’t have these functions.
You’ll get major supporters of both but you’ll have to make your mind up yourself.
Just make sure you’re getting value for money and aren’t paying someone else to do what you could have achieved in a cheaper and simpler way.
8. Invest regularly
The evidence is in. Investors putting their money into the FTSE All-Share index steadily over months and years end up doing better than the snipers sitting on the sidelines waiting to jump in on the dips.
This is because, while the market-timers hold their cash away from the market, they aren’t getting that sweet sweet compounding effect their regularly investing cousins are enjoying.
Making regular contributions into your investments means you’ll inevitably catch market highs and lows, with the logic that it’ll smooth out the journey eventually.
Avoid the temptation to time the market - I’ve lost count of the times people have told me they’re ‘just waiting for the right time’, only for them still to be waiting the next time I see them.
9. Keep fees in mind
One of the biggest drags on investment performance over the long term is fees. Whether it’s the cost of placing a trade, the ongoing charges levied by investment platforms and fund managers, or the costs of adding advice on top of it all, it can seriously mount up.
It’s incredibly important to pay attention to these and make sure you get value for money.
That means minimising or getting rid of costs entirely where there’s not much point in paying them (like trading fees, in some instances) and assessing whether the cost of paying for a professional to get involved really adds value to your investment journey.
Some of that won’t just be simple pounds and pence - peace of mind and letting an ETF or investment trust just carry on in the background might be worth a bit extra to you.
Similarly, if you’re not overly fussed on keeping track of what’s going on or don’t really have the time, outsourcing it to someone, or something (that came out creepy - I mean a passive ETF) might be attractive.
But, regardless of what you’re happy paying for - don’t get taken for a ride. You should constantly be forcing costs to justify themselves. If the charges outweigh the benefits it’s time to reassess.
10. Diversify, diversify, diversify
No rider has ever won every stage of the Tour de France, and no-one ever will.
Different parts of the competition require very different cyclists, from the long-range specialists to the mountain path climbers.
So how does a team give themselves the best chance of coming out on top? They select a range of athletes, each bringing different abilities to the party.
That’s how I like to think about my portfolio.
Having a blend of shares, bonds, some property and alternative assets like gold means my assets can pass the baton between themselves and take the lead when it’s their time to shine.
This helps take the overall spikiness of my portfolio graphs down a notch, as when one asset starts to falter, one of its uncorrelated pals will hopefully pick up the slack.
Again, the exact mix of assets will depends on your stage of life, what you’re investing for, your time horizon and just how spiky you’re willing for that graph to get.
Do your research and don’t put all your eggs in one basket.
10+1. Prepare to be biased
An extra one for good luck.
Before you begin investing (and regularly after that) remind yourself that, as a human, you will be a victim to behavioural bias.
You will get jumpy at market dips and you will get excited when it rises.
You will look at a stock graph and make snap judgements with no knowledge of the company at all.
You will think you are right even when the evidence shows you the opposite.
The trick is not to fight against all of this - if we could turn it off, we would - instead we should train ourselves to recognise when bias flares up.
Take a second to bring yourself back to the fundamentals of the companies you hold, your goal and your journey. Ignore the hype and the doom-mongers and stick to your own path.
You won’t always be able to do it but when you do, it makes everything that bit clearer.