Investing is both an art and a science

Creating an investment strategy is pivotal to reaching your financial goals

Investing is both an art and a science, with successful outcomes often hinging on applying sound principles. When employed consistently, these principles can help guide investors through the ever-changing financial landscape, providing a roadmap to achieving their financial goals.

Whether you’re a seasoned investor or just starting out, these principles – including establishing a financial plan, starting early, diversifying your portfolio, and understanding the trade-off between risk and return – are crucial to navigating the investment terrain effectively. Let’s examine these principles and how they can shape your investment journey.

Devise a strategy and remain committed to it
Creating an investment strategy is pivotal to reaching your financial goals rather than merely hoping for positive outcomes. Regularly reviewing your plan with a professional financial adviser and making necessary adjustments is important. However, focusing on your strategy can prevent you from being swayed by short-term market volatility.

Evaluate the implications of holding all your money in cash
While keeping all your money in cash might seem like a secure option, rising inflation can erode your savings over time. This trend is currently visible with UK inflation, coupled with escalating energy costs potentially exacerbating inflationary pressures and dampening economic growth. For those with long-term investment plans, it’s crucial to complement cash holdings with investments in other asset classes that can withstand inflation and offer superior capital growth potential.

Diversify and view your investments holistically
During market fluctuations, it’s easy to become consumed with worry about individual investments, losing sight of the larger picture. However, even when one asset class underperforms, others may thrive under the same market conditions. A diversified portfolio comprising various assets can help smooth market volatility and mitigate excessive risk exposure.

Begin investing early, if possible
Generally, the earlier you start investing, the greater your potential for long-term growth. Compound growth, achieved through reinvestment of earnings, is a potent tool but requires time to yield results. The ideal time to invest is after formulating a clear financial plan that necessitates growth.

Beware of ‘activity bias’
Investors often succumb to ‘activity bias’, a tendency to take action during a crisis, irrespective of whether it’s beneficial. In situations where investments are depreciating, abandoning your plan and selling off assets may be tempting.

However, this could be detrimental as you’d miss out on potential price recoveries. Recognising that markets experience cycles, with good and bad years, is essential. Over the long term, short-term market dips tend to even out, leading to potentially healthy returns.

A customised strategy is irreplaceable
Every investor has unique needs, and while the above points provide general guidance, nothing replaces a strategy custom-tailored to your situation. Especially in volatile times, professional financial advice can help remove emotional decision-making and provide a balanced perspective. This advice could be the best investment you ever make.