Long term investing for Freelancers

Successful long term investment is not just about buying low and selling high. Stock markets rise and fall, and share prices are vulnerable to everything from political news to the weather. Trying to find your way around – particularly during times of high volatility and uncertainty – can feel like negotiating a minefield.

So how can we make sense of such a confusing world? It is probably time to go back to basics – stock markets may rise and fall, but the rules of sensible investment remain constant. Wealth Matters’ Director and Financial Planner Paul Cleworth gives us the low down.

1 – Buy what’s right for you

An investment that works well for somebody else does not mean it is right for you. Consider your own situation – your future liabilities, your investment goals and your appetite for risk – and then make your decisions.  Don’t invest more than you can afford to.

2 – Diversify – remember asset allocation

Spread your risk by diversifying your portfolio across a mixture of asset classes (equities, bonds, property and cash), industry sectors (Information, Services and Manufacturing) and differing geographical areas of the world. If you put all your money into a single asset class, sector or company, your portfolio is very exposed and performance is likely to be volatile –whereas, if you mix it up, when one asset is going down, chances are, another asset could be going up and will help compensate. This is called correlation.Remember the old saying, “don’t put all your eggs in one basket.’

3 – Invest for the long term - This typically means more than 10 years

It’s hard work – and largely pointless – trying to ‘time’ your investment so you buy right at the bottom and sell right at the top. Similarly, trying to make short term profits by turning over investments quickly will get expensive and carries a high risk.  Instead, target your portfolio at quality companies or funds and then allow them the time and space they need to grow. It’s time in the markets, not timing the markets that counts. Markets move in cycles –there are peaks and troughs. For this reason, investing monthly means you can benefit from pound-cost-averaging.

4 – If an investment has risen substantially, take another look

There is an old rule of thumb which says ‘when your investment doubles, sell half.’  Short term sentiment in stock markets can drive values artificially high, in which case, you may want to cash in while you can. Don’t get greedy – you should never be ashamed to take a profit.

5 – Never buy what you don’t understand

Some shares or funds might sound very exciting and, indeed very simple, but if you don’t understand exactly what the company does or how the fund works, steer clear. There are well over 5000 ‘funds’ on the market– unit trusts, open ended investment companies(oeics) and investment trusts. Many of these are specialist funds, small in size and new to the market.  In the words of financial author Noel Whittaker, “Life is full of uncertainties. Future investment earnings and interest and inflation rates are not known to anybody.  However, I can guarantee you one thing -  those who put an investment program in place will have a lot more money when they come to retire than those who never get around to it.”

6 – Know when to say goodbye

If a holding has performed particularly badly relative to its peers, you need to consider cutting your losses and selling it altogether. It might be better to sell out and reinvest the proceeds into a quality alternative than to sit around hoping to recoup your losses.

7 – Don’t get emotionally attached

It’s wonderful if a holding has worked for you, but you don’t have to feel grateful: the share doesn’t know that you own it. You should look at every existing investment with the same clear headed objectivity as you did before you bought it – and when it’s time to sell, do so with a clear conscience.

8 – Be your own person – don’t follow the herd

Many investors became caught up by the euphoria which surrounded the dot-com boom of the late 1990’s simply because everyone else was and they did not want to miss out. It is hard to turn against the flow but always take a step back and think not just about what you are buying, but why.

9 – Review your portfolio regularly

Your portfolio has been set up to meet your objectives based on your needs today. However,over time, your needs and circumstances can change. The markets can also change – and your portfolio may need to be reviewed to make sure it keeps up. It is important to review your portfolio at least annually to make sure it stays on track.  A review highlights whether you should consider making any appropriate changes: fund switches, sales or purchases. Don’t forget the importance of re-investing dividends.

10 – Don’t believe everything you read

Headlines on TV and in the finance sections of newspapers can be misleading. Make sure you keep a clear head, remain focussed on your objectives and take advice from a qualified professional to ensure you are making the most of your investment portfolio. Make sure that you have a strategy. Speak to a professional.

By Paul Cleworth of Wealth Matters

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The value of investments and income from them can fluctuate (this may partially be the result of exchange rate fluctuations) and investors might not get back the full amount invested. Past performance is not a guide to future performance. The content of this newsletter is for general information only and is based on our understanding of current legislation and HM Revenue & Customs practice, which is subject to change. It should not be relied on and action which could affect your personal finances and your business should not be taken without professional advice.  Please contact an adviser at Wealth Matters for specific advice.

Wealth Matters Ltd is authorised and regulated by the Financial Services Authority.  We are entered on the FSA register No. 300635 at www.fsa.gov.uk/register/ Registered in England No. 3862593