Many people talk about what they think they know when it comes to investing.
I came across a pretty useful set of concepts in a presentation by Vanguard Asset Management recently. You may well know Vanguard as being one of the premier, low cost fund managers in the UK through their range of index tracking funds and ETFs.
However they also produce a lot of research around the subject of investing. They identify four ‘truths of investing’
Each of these is an important concept for any investor to grasp. One of my jobs as a financial planner has always been to get to the heart of what is important to an investor. The closer you can get to understanding why you are investing then the less important the ‘noise’ surrounding investments and markets quickly becomes.
Investors have a love/hate relationship with risk. We need it to be able to deliver returns, but also need to manage it to ensure as smooth a ride as possible through the course of an investment term.
You will never remove risk from a portfolio of investments, neither would you want to. But it is important to understand that different levels of risk are attached to different types of investment. These can be used to complement each other to create a portfolio that is suitable for an individual’s needs. Done well, then you can tailor every portfolio to any individual according to their own personal requirements.
Quite simply, the less you spend the more money you save. That is true of any financial scenario, not least in investing. Minimising costs puts more money in your pocket and less into the pockets of fund managers who will try their best, but not guarantee, anything in return. Costs are a certainty, performance is not.
Investing can be fun, exciting and scary all at the same time. Reacting to situations, following the markets and feeling the emotion of uncertainty is what drives so many to be dazzled by the markets. It is that same uncertainty that drives emotional decisions when investing money. It is that very emotional state that can often help you lose so much of your money too. Emotion and investments do not make a great match for each other. Trying to time the markets is an emotional decision. Many may think it is rational but ultimately it is about ego. Timing the markets, deciding whether to buy or sell is about thinking you know more than anyone else out there. That is more of an emotional state than anything and it can lose you money and earn you stress better than any hobby you could wish to partake in.
I wrote recently about the magic of compounding. Spending time in the markets gives your investment the best opportunity to deliver the returns you are investing for. Markets do not move in a straight line. They will fluctuate over time, just like tossing a coin does not produce a heads then a tails, then a heads then a tails. However the longer you can afford to hold an investment, the greater opportunity there is for the fluctuations to even out and the chance of your returns to deliver what you were expecting. Over time these returns will benefit from compounding to deliver additional growth. If you then undertake some re-balancing on a regular basis you will start to see the real benefits of investing according to theory rather than emotion.