“A goal without a plan is just a wish.”

Antoine de Saint-Exupéry

With a New Year upon us it’s a good time to think about investment planning, whether you are an experienced investor or you are just starting out in the investment world.  This article brings you some key points to consider when developing an investment strategy.

Why are you investing?

The reason you are investing is a key point, many investors will be looking to build a secure financial future, with quality investments that will provide a consistent level of growth or income or both over the long term.  Others, who are more speculative in nature with their money, might be looking for larger gains in a shorter time period, which is ultimately a riskier strategy.  It may be that you sit in both camps, if you have the money to invest this way.

When markets are performing well (a bull market), investing for the long term is the obvious thing to do, your portfolio is strong, you’re making gains and you’re getting the consistency you should be looking for with your money.  However, when markets start to drop (bear market) for one reason or another, your emotions may come into play and you may well be tempted to sell at a time when it’s more likely that you should be resolute and stay invested; particularly if you know that the investment is in a quality stock, bond or fund.  Obviously, past performance is not a guide to the future and it’s important to take advice before making any emotional decisions around your investment portfolio.

The first step is to understand what type of investor you are, your risk tolerance and what you want to achieve with your money in the short, medium and long term.

“Time in the market, not timing the market”

You may have heard this term before and it rings true in many ways.  Investors who try to time the market tend to use the same strategy to make gains on their money; they invest when prices are low based to historical performance and then; sell when they think the investment’s value is at a peak.  They look out for hot investment tips and repeat the same cycle.

Whilst investing in this way may seem like a reasonable way of making money, even the most sophisticated and experienced investors with years of experience cannot foresee the unpredictability of the financial markets. Timing the market can ultimately give way to emotional reactions.

To be successful at market timing, you need to be able to correctly determine when to sell and then correctly determine when to buy. With markets falling and rising sharply using this type of strategy means your timing has to be perfect.  If you do get this right, it’s more likely that it is based on luck than good judgement.

On the other hand, investing with a long term strategy, riding through the emotions of a bear market and hopefully making gains again on when the bull market turns, will give your money the ‘time in the market’ it needs to take you towards your future goals.

Planning Ahead

Whether you have an investment portfolio already or you are starting out for the first time, the investments you select should be backed up by a solid plan that is based on your individual needs and goals.  What’s right for one investor isn’t necessarily right for another and while you may get advice or ideas from people you know, your decisions ultimately have to come down to what you want to achieve.

Putting in place a good long term investment strategy may include:

  • investing set amounts on a regular basis, allowing you to benefit when the market drops and potentially purchasing quality stocks at lower prices;
  • ensuring you are diversified across different asset classes (see our article on having a diversified portfolio) to benefit further from fluctuations in the market and;
  • reinvesting dividends to increase your overall portfolio value.

Reviewing your goals

A lot can happen in a year so as always with financial investment planning, reviewing your strategy at least annually or when any significant changes occur in your circumstances is the best way to ensure that your investments continue to provide you with the outcomes you expect. You are not certain to make a profit – you may lose money.

One of the most important messages I feel, is that you must try not to over-react to fluctuations in your portfolio, take advice if you feel unsure about something and hopefully that will help you make decisions that are based on your long term strategy, rather than emotion.

For more advice on types of investments download our Advice for Individuals PDF and remember we are here to help.

The purpose of this article is to provide technical and generic guidance and should not be interpreted as a personal recommendation or advice.

Angus Kirk

Financial Planner at Bridge Investments
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