Today, as part of the new Telegraph Money website, we embark on a relaunch of our investing content. In harmony with the aims of the broader Money site, our goal is simply to help readers make better investment decisions.
If you have never invested a penny in your life, don’t panic: we seek to make everything we publish intelligible and useful to readers of every level of experience, from the absolute beginner to the reader who has been investing for decades.
This introductory piece endeavours to live up to that aim by listing our key rules for investors at either end of the experience spectrum.
For first-timers, we hope our rules will set out some of the most important guidelines to ensure you avoid the pitfalls of investment, of which there are many; for the experienced, they may serve as a reminder of principles that we can lose sight of when we become embroiled in the detail of individual investments, not least because “information overload” is an ever-present risk.
Here then, are investment’s 11 most important rules.
1. Be in it for the long haul
Investment is a long-term game. If you cannot tie up the money you are thinking of investing for at least five years, it’s not right for you.
This is because the value of financial assets such as shares can fall dramatically and without warning. Fortunately, this is rarely the end of the story and markets almost invariably recover and, indeed, rise further – this, after all, is why we invest.
However, that recovery can take time, perhaps years. Anyone who invests for a shorter period is taking a big risk.
2. Set your goals at the outset
Before you invest a penny, take the time for an unhurried assessment of your financial circumstances, and what you want to achieve by investing some of your money.
Write down how much you can afford to invest (either monthly or as a lump sum), how long it will be before you will need to use the money you invest, what kind of returns you would like to achieve and what kind of losses you could tolerate if things went badly – and there is always that possibility.
The last point is especially important. Large losses can cause disruption to your life, an end to peace of mind, relationship trauma and more.
Be honest with yourself (and your family) about the worst that could happen and how you would react. There’s no shame if you decide that the risks are not for you and that you’ll stick to cash savings instead.
Review what you have written a week later to make sure you are really comfortable with it, and revisit it from time to time in the years ahead.
3. Accept uncertainty
We said above that markets invariably recover. However, it’s not certain that the future will always follow the patterns of the past, and it’s not certain that every individual investor will recover his or her initial losses – it depends on what exact assets are involved and what price was paid for them.
This is all to emphasise a key fact: there are very few certainties when it comes to investment.
An acceptance of uncertainty on various fronts – over the economy, over the performance of individual businesses, over how markets value your investments – is essential.
4. Diversify
If all the above sounds too negative and a list of good reasons not to invest, it’s time to remind ourselves that investors have two key tools that, used together, will almost certainly make them richer.
The first we have already mentioned: time. If you can invest over a period measured in decades, you are very likely to have made good returns when the time finally comes to use the money you have tucked away.
The second tool is equally vital, however: you need to spread your money among a variety of investments.
Imagine, for example, that you have just read a positive write-up of a particular company – in a newspaper share-tipping column such as our own Questor, for example – and are tempted to put all your money into shares in that company.
This is a recipe for disaster, and is to be avoided at all costs. There are simply too many things that could go wrong, even at the best run business.
Instead, if you have decided to invest all your money in the stock market, spread the cash among at least 10 stocks, and ideally more.
First-time investors, unless they are prepared to devote serious time and effort to the study of companies and the stock market, are likely to be better off investing in funds – ready-made portfolios of shares or other assets.
Some investors – the younger ones and those with higher tolerance for risk – may well want to put all their money into the stock market (whether directly or via funds), as shares have historically produced the best returns.
Investors closer to the time when they will need to withdraw their money, and those with less tolerance for risk, will probably want a portfolio that is a mixture of stocks, bonds, cash and perhaps other assets such as property (which you can invest in via funds).
