Opportunities in the current investment markets
With interest rates at an all time low, it is more important than ever to consider investing your savings rather than leaving them to gather dust in a high street savings account. Despite the current gloom and doom there are plenty of opportunities in investments, as long as you follow these simple rules.
Contractors looking to maximise the opportunities in the current market should bare the following rules in mind when choosing where to invest:
- Take a medium to long term approach to investing, this is most important when dealing with equities and property
- It pays to keep some cash aside as an immediate access, rainy day fund
- Inflation busting investments such as property or shares are a must for the long term investor
- Minimise risk with a diverse portfolio
- It is foolish to try to time the market, drip feeding is the way forward
- Never judge a fund on its short term performance
Investment can be a daunting topic but it is simply a case of considering how much risk you are willing to take and investing accordingly. You should never invest what you cannot afford to lose and this is true under any market conditions and with every form of investment. Following a few simple rules for investing in a volatile market should help to minimise the risk and maximise the rewards and it is even possible to make money whether one particular market rises or falls.
1. Take a medium to long term approach to investing, this is most important when dealing with shares
When making investment decisions we often look to the past to try to predict what may happen in the future. History shows us that when markets have been down in the past they have always picked up again, even when the fall was 20% or more (referred to as a bear market) it has almost always recovered within 2-3 years.
If you can afford to leave your money in an investment for a period of around five years or more then you should be able to make money as the economy goes through a full cycle. Whilst current circumstances are unprecedentedly volatile it is importnat to sit on your hands and ride out the storm becuase assets such as shares and property are designed with a long term approach in mind. As such there is an opportunity to buy now while the markets are in trouble and then potentially clean up when they begin to grow again in the future.
You could see substantial growth in your portfolio within the next 2-5 years as even in the worst bear market in history that occurred between 2000 and 2003, the market had fully recovered by 2005. However, it is worth bearing in mind that this can be a risky strategy for those Contractors that need to access their money in the short term as volatility in the market can mean an investment may fall in value at any time over its lifespan.
2. It pays to keep some cash aside
The last thing that you want to do is leave yourself without any cash put aside, as you don't want to have to cash in an investment when it is potentially at its lowest value. Keeping enough cash to cover your monthly expenses if you were in between contracts for a period of time is vital, especially for Contractors as you cannot reliably cover yourself with redundancy insurance.
If you hold enough cash in a high interest savings account or a cash ISA to cover these potential expenses then you can rest assured that your other investments will be left alone until the market picks up and you can cash in on any growth.
3. Inflation busting investments such as equities or property are a must for the long term investor
If you are planning to invest in your pension, to put a child through university or to leave an inheritance for younger generations, then you are probably looking at the long term potential for growth. However, it is equally important to consider the effect that inflation may have on an investment over time.
It would be soul destroying to find that an investment you make now is worth less than what you paid in, when you come to release the cash and you at least want to have the same spending power in 10, 20 or 30 years time that you can enjoy now. It is possible to inflation proof your investment and history has shown that equities and property are far better at beating inflation than investing in traditional savings accounts for example.
4. Minimise risk with a diverse portfolio
We often find that our clients invest in areas that they feel comfortable with or know particularly well, however we would advise that you try to diversify your portfolio as much as possible to maximise the potential gains that you can make in the current conditions.
Keeping your portfolio diverse across different world markets, asset classes, sectors and investment managers will allow you to benefit from growth in different areas at different times and help you to avoid the "all eggs in one basket" syndrome. For example, emerging markets tend to behave very differently to developed markets such as the UK and USA.
5. It is foolish to try to time the market, drip feeding is the way forward
It is a natural instinct to buy when markets are doing well and sell when they are falling, yet this is not the attitude to take for successful investing. History shows that markets can turn quickly and dramatically and often without warning so taking a long term approach to your investments should help you to benefit from its volatility rather than become a slave to it.
It can be devastating to watch an investment fall only to pull out and within a few hours it has grown to exceed its original value. Trying to time the market is a fools game, by taking a long term approach you are free to sit back and enjoy the ride.
Pound cost averaging can also help you to minimise the volatility in your portfolio as it involves spreading your investments over a period of time. If you invest all of your money on one day then you are bound by the market conditions on that day, whereas drip feeding a percentage of your total investment over a period allows you to spread the risk across a number of days, months or years.
6. Never judge a fund on its short term performance
When choosing which funds to invest in, it can be tempting to opt for the top performing funds at that moment in time. However, it is important to consider the performance of that fund over a period of time (most analyst's use a period of three years) in order to determine its suitability.
Try not to jump straight in and choose your funds blindfolded, although this works for some people, it is far better to take an informed approach to investing. Always bear in mind that a loss is only a loss if you sell your investment, the only figures that are of true importance are the price that you bought at and the price that you sell at as it is these figures that determine how much money you have made or lost. If you can ride out the falls then there is no reason why you cannot make a successful investment in this unsettled market as it will have to rise at some point in the future.
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