Our Head of Investments, Andy Parsons, recommends some tips to make investing simply easier
Make investing simply easier this National Simplicity Day
National Simplicity Day is celebrated annually on 12 July, the birthday of author and philosopher, Henry David Thoreau. At his heart, Thoreau was an eternal advocate for living a life of simplicity; in his book Walden he asserted “as you simplify your life, the laws of the universe will be simpler.”
From an outsider looking in, the world of investments can appear to be a complicated place. There is often too much choice and too many people out there giving advice, advice that can often be complex and complicated. However, most people’s investment and saving aims are pretty simple; to construct a nest egg that can pay for monetary milestones such as a new car, a first house or retirement.
Choosing the right investment doesn’t have to be complicated, as investing greats Warren Buffett and Peter Lynch will tell you, simpler is often better. In fact, Mr. Lynch put it this way: "The simpler it is, the better I like it".
1.Set up a direct debit so you don’t have to think about it each month
We all too frequently set up monthly direct debits for mobile phones or gym memberships so why not one for investing. After a couple of months it becomes a standard feature of your monthly outgoings, whilst actively working for you through investing for your future. And by investing each month, should the market fall at any time, you end up purchasing more units/shares.
2. Allow an expert to do the work for you by investing in an active or passively managed fund
If you believe you don’t have enough time or knowledge to invest, investing into a fund could be the answer. Choosing the right share can be complicated and time-consuming but a fund whether it is actively managed by professionals or a tracker following an index can help take the strain and worry away.
3. Buy what you know and believe in, if you don’t understand what you are buying then don’t buy it
Billionaire investor Warren Buffet is famous for telling investors to buy what they know; he suggests investing in companies you really understand – or at least know enough about them to recognise how they make money. Buying shares in familiar companies can be a road to riches, but also make yourself aware of popular trends in society – if you have to queue for longer in your favourite store or your ‘must-have’ product is regularly ‘sold out’, then the company behind that product or the distributor (the shop) is potentially doing very well. So why not buy the company, as well as the product?
4. Invest for the long term to ride out the volatility and let your investments work for you
No matter what the outcome, there will be winners and losers in terms of the markets. Market volatility is often seen by many as the enemy of private retail investors, yet if carefully considered; it’s possible to make it your friend. During volatile times it’s important to take a step back and think about why we’re investing. If the investment goal, and time frame associated hasn’t changed, firmly remaining in the future then you should sit tight – do not make irrational decisions. Adopting a ‘little and often’ approach is an achievable strategy, and drip-feeding into an investment can help reduce exposure to volatility while also benefiting from the returns.
5. Ensure dividends are automatically reinvested to help benefit from the powers of compounding
If you own stocks, you’re likely to receive regular dividend payments from at least some of those investments. It might seem tempting to take the cash and spend it elsewhere – but it almost always makes more sense to reinvest your dividends. There are many reasons to choose dividend reinvesting over taking cash but simply put, dividend reinvesting supercharges an investor's long-term returns.
Investing can seem daunting. Aside from the complexities of the language which can seem impenetrable, potential investors are often fearful of the risks involved and question whether they have enough money to get started. Of course you should pay off any debts and have some cash savings for a rainy day before you start investing and exposing your hard-earned savings to risk. Once you are ready to get started even saving just a modest amount, a few tens of pounds, each month can build to a substantial pot over time. Everything in life is now typically paid for on a monthly subscription – your phone, car, TV and broadband, even film and music streaming. The easiest thing to do is to treat your investing like a monthly subscription, putting away a regular amount each month. Investing should be seen for the long term and by selecting an investment trust or fund, the risks are diversified away from investing in just a single company. Past performance is never a guarantee of future performance, but the longer your time horizons and the earlier you start, the greater the opportunity to ride out market volatility and realise your dreams.