Unfortunately, taking advice from unqualified and inexperienced investors often comes at a cost. Sometimes the cost can be upfront and sometimes it can show in the damage done to your portfolio over time.
Investing gurus don’t want you to know that good investing isn’t anywhere near as complicated as you might think. The secrets to good investing are often the most straightforward.
Here are just a few things to keep in mind when building your portfolio.
Contrary to popular belief, debt isn’t inherently bad. In fact, you can often use credit to your advantage.
Many people rush to pay their debts early without questioning whether that money could be put to better use elsewhere. For example, if your mortgage interest stands at just 1.8% but you can get a 7% return by investing in funds, the latter makes more sense mathematically.
This isn’t to say that overpaying your mortgage is pointless. There are certainly psychological benefits to freeing yourself from mortgage debt.
We don’t always have to base our financial decisions on the single best option at that moment in time.
One of the worst things you can do is pour money into certain investments without considering your goals for the future.
Why do you want to build wealth? Do you want to retire early, move abroad or help your children buy their first homes? These are just a few life goals that you might want to discuss with your adviser.
They’ll look at everything from projected growth to the tax-advantages of certain options.
They’ll also assess your attitude to risk before steering you away from investments that don’t match up to your personal tolerance.
With the help of clear goals, you can determine which investments are right for you and which are best avoided.
Many people assume that in order to be a smart investor, they need to stay up-to-date with industry developments and stock market changes. This can be satisfying if you’re interested in that sort of thing, but you certainly don’t need to be an expert.
If you’ve taken your adviser’s advice and have built a diverse and balanced portfolio, adopt a ‘set and forget’ attitude towards your investments. Keep some distance from your portfolio and avoid checking up on its performance.
Buy the investments, log out of your account and get on with your life. Being too involved can lead to irrational decisions.
You’ll struggle to forget about your investments if you don’t automate them.
By setting up regular payments into your investment account, you can focus on your work, family and passions while letting automation do its thing.
They say a watched kettle never boils and the same can be said for your investments.
Remember what we said at the beginning about investing gurus?
They’ll use everything from political events to Elon Musk’s tweets to encourage other people to trade.
Changing your investments based on the news is a slippery slope. If you’re going to alter your investments, it’s usually better to do so based on what’s happening in your own life.
Too much noise will only encourage recklessness.
Compound interest is what makes your money grow without you having to lift a finger. It’s often referred to as ‘the eighth wonder of the world’ by investing experts and advertisers alike.
Compound interest is so powerful that money invested earlier in life has more potential than money invested later. Even those on modest incomes can retire millionaires, if they start early enough.
In his book The Psychology of Money, Morgan Housel explains that time is largely responsible for Warren Buffett’s immense wealth.
Buffett started investing when he was 10 but had he waited until he was 30, he’d now be worth just $11.9 million, rather than $80 billion.
Housel writes: “Effectively all of Warren Buffett’s financial success can be tied to the financial base he built in his pubescent years and the longevity he maintained in his geriatric years. His skill is investing, but his secret is time. That’s how compounding works.”
Being intentional with your spending is all about figuring out what’s important to you and identifying those common life expenses that can be cut from your budget.
For example, perhaps you spend more than £1,000 each year on a generous Sky package, Netflix, Amazon Prime and Disney+, even though you don’t watch that much TV and your son’s away at university most of the year.
Meanwhile, your National Trust membership and weekly personal training session may be non-negotiable. By sitting down and working out which expenses make a difference to your overall happiness and wellbeing, versus those that are unlikely to be missed, you can direct more money towards your investments.
Being intentional is also a great way to invest in life itself. As important as it is to save and invest, life is for living and money is for spending. Whether you love going out for breakfast every Sunday or you want to fill your home with original art, identify those things that make your life richer, rather than focusing solely on the health of your investment account.
