Investment director shares ‘important way of building financial resilience’
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It can be daunting looking at all the investment options, strategies and methods as a first-time investor, especially when many don’t even know how to begin. David Miller, investment director at Quilter Cheviot, shared how to start an investing journey and the best practice to keep in mind.
“Investing is not for everyone, but for those with savings and a willingness to take on some risk it is an important way of building financial resilience and long-term prosperity,” Mr Miller commented.
“Despite being essential for building long-term financial prosperity, some people perceive it to be too risky or too complicated for them.”
This is why prior research and some market knowledge is so crucial to succeeding in the investment sector.
Set realistic objectives
“Before anything else, step back and think about what your investing objectives are.
“Think about what you want to achieve, how much money you’ll need to achieve it, and whether this is something financial markets can actually deliver,” said Mr Miller.
A common misconception is that the investment markets are a way to ‘get rich quick’ and while that is possible in very specific circumstances, in requires a great deal of experience, knowledge and often just pure luck to get to that point.
Starting off small with the goal of earning a certain amount in a certain time period already helps to narrow down the available options.
“Generally, people either invest to achieve a steady flow of income, to generate capital growth, or a combination of the two.
“What you want to achieve will affect the investments you pick. If you just want to get rich quick, forget it.
Decide on how much risk you are willing to take on
Mr Miller continued: “As part of setting your objectives, you should think about when you’ll need the money – and therefore how long you can stay invested – and what risk you are willing to take.
“Everyone is different, but as a general rule the younger you are or the longer the time horizon you are investing for, the higher your risk profile could be.”
Many first-time investors opt for a lower risk investment which will hopefully see small returns in the future, however, even high-risk strategies can be a cautious option.
The longer period of time ones investment remains in a high-risk investment lowers the total amount of risk they face with that single investment, but it is still important to remember that every investment has a risk factor.
“It is important to also consider your capacity for loss. If you were to lose all the money you put in, how would this affect your lifestyle?
Choose what to invest in
“Once you have done this preliminary work, you can think about how you will actually allocate your money and what you will invest in,” said Mr Miller.
“Generally speaking, the more risk you are willing to take, the more you should invest in equities and the less in cash and fixed interest, with alternatives acting as a stabiliser in times of stock market stress.
“It is worth having around five percent of your portfolio in cash to exploit market opportunities,’ he commented.
There is a wide array of options to invest in, from assets to equities and sustainable investing, and a diversified portfolio with a ‘little bit of everything’ has proven to be one of the most successful strategies.
“Remember to invest in a variety of funds across various geographies and asset classes to properly diversify the portfolio.
“Diversifying the portfolio will reduce the correlation in the underlying assets, meaning when one part of the portfolio gets hit, another steps in and helps protect value.
“Also think about liquidity when building your portfolio,” he added.
“Often people don’t think about this until it is too late.
Then there is also the popular option among first-time investors: funds.
“Unless you want to spend hours on company analysis, investing in funds or trusts would be more suitable than investing in individual shares.”
Mr Miller continued: “Plus, there are added diversification benefits of selecting a fund or trust, as the manager will hold a number of shares.
“You’ll need to choose between an active fund, where a fund manager tweaks the portfolio depending on the current investment landscape, or a passive fund, where the investments track an index such as the FTSE 100. It could well be that you opt for a combination of both.”
“After you’ve set your asset allocation, and have selected various funds you consider suitable, you should keep an eye on your portfolio, but avoid the temptation to make tweaks at the first sign of trouble.
“Investments should be held for years, if not decades, so as long as the investment case remains intact, don’t jump ship at the first sign of volatility,” Mr Miller stated.
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