With a cocktail of low interest rates and rising inflation eroding the value of money stashed in savings accounts, it is little wonder that savers are tempted to invest instead.
But as any experienced investor will tell you, successfully investing in shares and bonds, whether directly or through funds and investment trusts, requires a plan and the discipline to stick to it.
Whether you are a new or seasoned investor, a willingness to recognise both your strengths and weaknesses and learn from others is essential.
To help you on your way, we asked Steven Andrew, a fund manager in M&G’s Multi Asset team, to draw on his experience and offer some top tips.
Hang fire: While it is notoriously difficult to time the market, a common mistake is selling too early and before an asset has realised its potential
Work out why you want to invest
Whether you are taking the first steps on your investment journey or re-evaluating how your money is being put to work, the first step is to decide on your financial goals.
Do you want your investments to help supplement income that you are receiving from other sources, like your pension? Alternatively, are you aiming to grow your capital over the long term, or perhaps preserve its value from being eroded by rising prices?
Weigh up risk and return
Once you know what you want from investing, you’ve got to think about how long your investment horizon is. If you are investing for income today, your approach should be very different to how you would invest if you are able to lock your savings away for decades.
Also think about how much risk you can afford to take with your money. The price for pursuing opportunities is the risk that potential successes will not be realised, and the chance then that you could lose money. Nobody likes uncertainty but ultimately investing comes down to accepting some level of risk.
One of the biggest risks in investing is misunderstanding the nature of risk, and perhaps not accepting enough. Depending upon your own situation, taking on some risk could be helpful, even essential, in meeting your financial goals.
Once you have established your own approach to risk and return, you can turn your thoughts to what to invest in.
Build a portfolio that spreads your risk
Achieving effective diversification across your investments is key. The more narrowly you invest, the more reliant you will be on individual assets, or parts of the global market, to deliver the returns needed to realise your financial goals.
It can never guarantee against losses, but spreading your money across different types of assets can help protect your portfolio from individual failures and, to some extent, wider shocks in the market. Owning a breadth of assets can also expand the potential upsides of investing, by widening your pool of potentially successful investments.
Constructing a diversified portfolio is not always easy. It can require resources and expertise that might be prohibitive for you, as an individual investor. You might find it easier, cheaper and more effective to invest through professionally managed funds that pool many individuals’ money to invest in a greater breadth of assets.
Spotting investment opportunities may require some sleuthing but a bit of work can pay off handsomely – and help you avoid duds
How to spot investment opportunities
In a nutshell, my investment approach is to separate noise from fact, and risk from opportunity.
Staying focused on what will actually determine how well any investment will perform over the long run can be a challenge. It is especially difficult when the received wisdom among investors is either to panic – pushing asset prices too low – or to become wildly optimistic – pushing them too high.
I look out for ‘episodes’, or periods of time when assets become cheap or expensive as a result of investors reacting emotionally to events, ignoring fundamental investment principles.
Having a consistent approach to valuing assets can help you identify make the most of such episodes. Identifying when assets are underpriced can lead to finding some fantastic investment opportunities.
Know when to sell or hold investments
Humility is important in investing, and recognising that no-one can out-think the market. As my father used to say, ‘only fools are certain.’
It is notoriously difficult to time the market, even for professional investors. However, a common mistake among investors is selling up too early, before an asset has realised its potential.
Valuation is all important. The price of any asset rises and falls from week to week, but its fundamental value – what it is really worth over the longer term – might not have. So long as the returns that you are receiving, or that you could prospectively receive in the future, fairly compensate you for the risks associated with the investment, it’s important not to rush into jumping ship or cashing out.
This said, there is no place for being sentimental about investment choices you’ve made in the past. It’s important to be on the look-out for better opportunities elsewhere in the market.
Get a free guide to investing
How to be a successful investor is This is Money’s easy to understand and jargon-free guide to the world of investing.
Our guide is designed to help both those new to investing and those who already invest, with tips to help them along the way.
The guide is written by This is Money editor Simon Lambert, who writes a regular Minor Investor column and presents The Investing Show.
Whether you want to invest in active funds or passive trackers, pick shares yourself or get professional advice – or simply find out more about the world of DIY investing – it is there to help you.
The 40-page PDF guide, sponsored by M&G Investments, is short enough to be read in one sitting, but you can also keep it for reference when investing.
You can download it here or by clicking on the button above.