Investing is not just about what you know but also who you are and your attitude to risk. The key to successful investing is not always about predicting the future – it is also learning from the past and understanding the present. Investing offers potential to grow our money, reach our goals and live the life we want. Regardless of the market conditions at the moment, the keys to successful investing are almost always the same.
Cash savings vulnerable to erosion by inflation
Investors often regard cash as a safe haven in volatile times, or even as a source of income.
But even though we have seen a small rise in interest rates, we are still experiencing a period of ultra-low interest rates which have depressed the return available on cash to almost nothing, leaving cash savings vulnerable to erosion by inflation over time.
With interest rates expected to remain low, investors should be sure an allocation to cash does not undermine their long-term investment objectives.
Cash left on the sidelines earns very little in the long run. Investors who have deposited their cash in the bank may have missed out on the impressive performance that would have come with staying invested over the long term.
It is important to recognise though that other investments do not include the same security of capital which is afforded with a deposit account, and there is always the possibility you may get back less than the amount you invested.
Making an enormous difference to your eventual returns
Compound interest has been called the eighth wonder of the world. Its power is so great that even missing out on a few years of saving and growth can make an enormous difference to your eventual returns. You can make even better use of the effects of compounding if you reinvest the income from your investments to enhance your portfolio value further. The difference between reinvesting – and not reinvesting the income from your investments over the long term can be significant.
Be prepared for the ups and downs of investing
Volatility in financial markets is normal, and investors should be prepared for the ups and downs of investing rather than having a knee-jerk reaction when the going gets tough. The lesson is, don’t panic: more often than not, a stock market pullback is an opportunity, not a reason to sell.
Investors should look to keep a long-term perspective time in the market, not timing the market
Market timing can be a dangerous habit. Pullbacks are hard to predict and strong returns often follow the worst returns. But often, investors think they can outsmart the market, which they may later regret. As the saying goes, ‘good things come to those who wait.’ While markets can always have a bad day, week, month or even a bad year, history suggests investors are much less likely to suffer losses over longer periods.
Reducing risks while improving returns
The last decade has been a volatile and tumultuous ride for investors, with natural disasters, geopolitical conflicts and a major financial crisis. One of the most important tools available to investors is diversification. This allows an investor to reduce investment risks while potentially improving investment returns. A diversified portfolio is typically split across a range of different asset classes, with exposure to different companies, industries and types of market from different regions around the world. In a diversified portfolio, the assets don’t correlate with each other. When one rises, the other falls. It lowers overall risk because, no matter what the economy does, some asset classes will benefit.
Please contact Matthew Bromley, Chartered Financial Planner at Cowgill Holloway Wealth Management for further advice or to discuss your situation.
This article is for general guidance only. It provides an outline, and may not include points which are important to your situation. You should not depend on this blog without taking advice based on the full facts of your case. The information given was correct at the time of publication.