Home of SME Club
Top Tips from Quilter Cheviot
Top tips on investing
28th May 2019, 8:52 am
What specialty do you have which other people just can’t understand?
It might be what you do for work, a DIY or culinary skill or always winning at a particular board game. Whatever it is, we all have some things that appear easy to master for us, but which are completely mystifying to others.
In my case, the mystifying area is investing. People tend to see investing as a difficult subject, something they will never understand. This is a shame. A little investing knowledge is not hard to acquire and can go a long way to helping you improve your quality of life or giving you financial peace of mind.
I’ve therefore put together seven tops tips for people hoping to understand their investments. This won’t make you an expert, but it should hopefully provide a checklist of what to do, and answer some of the common questions people come to me with. My first three tips outline some common knowledge needed for investing, while my last four offer some useful pointers on rules to follow when looking after your investments.
1. What is investing?
Let’s start right at the beginning. If you’re an investor, you generally invest in one of two areas:
- Shares, also known as stocks or equities, are where you buy a stake in a company
- Fixed interest securities, also known as bonds are where you buy the debt of a company
Within these two areas – or asset classes – there are various sub-asset classes. Going from low risk to high risk, for example, fixed interest securities are normally split into three types of investment – government bonds, investment grade bonds, and high yield bonds.
There are other areas or asset classes that you can invest in, but the majority of most people’s portfolios will be in the above two areas. You can combine different investments to build a portfolio that will meet your own financial goals.
2. What’s the difference between a financial adviser and investment manager?
This is a common question and people often confuse the two roles. A financial adviser is for a more holistic look at your finances, such as deciding the different things you want to save and invest for, and how you can go about reconciling different financial goals.
An investment manager is more for the running of the investments, making sure they reflect your individual strategy and financial goals. An investment manager will work closely with any financial adviser to ensure your investments are meeting your financial goals, or they can work with you on a standalone basis.
3. There is no return without risk
Generally speaking, the more risk you take with your investments, the higher your returns will be. When investors talk about risk, they are usually talking about your risk of losing money, or how much the price of your investment will fluctuate by. Shares are seen as the highest risk investment, as the value of your holding can go to zero if the company goes bankrupt. Fixed interest securities are generally seen as safer, with the risk of a government like the UK or US not repaying its debt very low.
4. Go global and diversify
Diversifying your investments is a useful way to access opportunities in different parts of the world. Buying US shares, for example, gives you better access to growth in areas like the technology industry, while investing in upcoming countries like India or China allows you to tap into the faster growth of these economies.
Diversifying globally is also a useful way of spreading your investment risk and making you less dependent on the fortunes of any one part of the world. Some of my clients find this a particularly reassuring point given the current uncertainty around the UK’s future relationship with the EU.
5. Tax, tax, tax
I cannot emphasise enough how important tax allowances are. Using tax allowances is probably the biggest factor in ensuring your wealth grows over time that is within your control. Gains inside an ISA are exempt from the 20% rate of capital gains tax for higher rate taxpayers, as is any income from your investment. For a pension, tax wrappers can make an even bigger difference as you get tax relief on your contributions and don’t pay tax on the growth of your investments.
6. Have adequate cash reserves
The key to successful investment is being able to invest for the long term. It’s therefore imperative that you don’t invest money that you might need in the short term – generally anything in the next five or so years.
If you invest money you might need in the next five or so years, you run a heightened risk of having to sell at a loss. If this happens, and you are forced to sell at the bottom of the market to fund outgoings, you will have permanently destroyed wealth. Any permanent destruction of wealth can be difficult to recover from.
7. Keep your head when all about you are losing theirs
There are always plenty of reasons to be nervous about investing. Over the long-term, however, it pays to stay invested. A good example of the perils of panicking occurred back in January 2016. Investors were unnerved by a slew of poor US economic data and fresh fears over the health of the Chinese economy, and there were several prominent news articles encouraging people to sell their investments. Three years on, however, global share markets have gone on to deliver returns of more than 30%, and those who sold at the bottom of the market have missed out on big potential gains.
My seven tips above are not the be all and end all of investing, but they should help to demystify the world of investments for people. You don’t have to know everything when it comes to investing, but it helps to have a little bit of an understanding even if you pay for professional advice.
There are plenty of resources online for people who want to find out more – whether that’s our own website at www.quiltercheviot.com or more generalist sites like the Money Advice Service. Regardless, I would always encourage people to try to build a basic understanding of investments. It is your money after all, and knowing a little bit about the subject can help you make better financial decisions and secure peace of mind.