Investing can be complex, especially for the inexperienced investor. It is easy to feel overwhelmed and end up making decisions on a whim. Having a strategy and goal in mind can help you take the right actions.
Developing a strategy
Having a good investment strategy can make things clearer, by narrowing down your options and giving you a disciplined system to stick to. Ask yourself a few basic questions to get started:
- What are your investment goals? Are you looking for a secure income, long term capital growth, or a combination of the two?
- What is your attitude to risk? Achieving a level of risk that you are comfortable with is extremely important when it comes to investing.
- How long can you relinquish access to your money? Investing should be considered a mid-to-long term commitment (usually understood as 5 years or more).
- Do you have preferences around how your investment is used? Do you want to invest in companies that are ethical or socially responsible?
Investment decisions require careful consideration and it's always important to remember that you could end up losing some or all of what you put in. Careful research can help you understand the level of risk involved in a particular investment.
Once you’ve decided on your goals and attitude to risk, you can begin thinking about your strategy.
One of the most important things to get right when investing in the stock market is timing. The general idea is to buy shares when the price is low and sell when it rises - the tricky part is working out when that will be. Committing your money for the long term can reduce the importance of the exact time that you invest, as your investment has longer to recover from short term market falls.
If you are investing a large sum, you may want to consider spreading it out over several smaller installments, or make regular monthly contributions to a fund. If you do this, your returns could benefit from a process called pound cost averaging. This is the idea that, because you’re investing a set amount each month, your money will buy more shares when prices are low, and fewer when they are high. This continuous drip-feed method should mean that your average purchase price over any given period is lower than the market average. The more the market swings, the more you stand to benefit from this principle.
Developing a well balanced portfolio can help to reduce some types of risk; if you only invest in one specific area of the market and that sector has a sudden drop, you could lose a large amount of your investment. Investment funds can be a good way to achieve a balanced portfolio, as well as greater peace of mind. Most funds are run by a fund manager, who will invest your money – and that of the other investors in the fund – based on what s/he thinks will produce the greatest returns.
Check out the investing for beginners guide to find out more.
It is important to remember that all investments carry some risk, and you could lose some or all of what you put in. When making decisions about how you want to investment, you may find it beneficial to speak to a financial adviser.
Last updated: 03 June 2015