With the relentless stream of news readily available about financial markets, it can be tempting to focus on the latest economic data, stories about high profile investment managers or the performance of individual funds. Such an approach could lead you to overlook the basic principles that can give you the best chance of success.
These principles rest on a simple idea: focus on what you can control.
Goals – You should create clear, appropriate and realistic investment goals. The investment process begins by setting measurable and attainable investment goals and developing plans for reaching those goals. The old adage, fail to plan, plan to fail could never be more true.
Balance – Develop a suitable asset allocation using broadly diversified funds. A successful investment strategy starts with an asset allocation suitable for its objective. Investors should establish an asset allocation using reasonable expectations for risk and potential returns. The use of diversified investments helps to limit exposure to unnecessary risks and diversifying globally enhances this.
Cost – Minimise costs. You can’t control the markets, but you can control how much you pay to invest. Every pound that you pay in costs and charges comes directly out of your potential return. Indeed, research suggests that lower-cost investments have tended to outperform higher-cost alternatives.
Discipline – Maintain perspective and long-term discipline. Investing evokes emotions that can disrupt the plans of even the most sophisticated investors. This can lead some people into making rash decisions based on market volatility. It is important to counter emotions and short term thinking with discipline and a long-term perspective.
In summary, a successful investment plan may include objectives, a timescale, risk profiling, an investment mix, monitoring and reviewing. By sticking to a predetermined plan this also helps to guard against the tendency to chase returns by moving into and out of the best and worst-performing sectors based upon recent past performance. Many investors fall prey to this trap. But, by rebalancing to your original allocation rather than chasing market performance, you can help to ensure that your portfolio remains aligned with your goals and your appetite for risk. Such a well disciplined approach to investing will serve you in good stead.
By Fraser Porter, Chief Executive Officer, AAB Wealth Limited
To find out more about Fraser and the Wealth Management Team, click here.