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The three investment truths I know for sure

16th May 24 8:16 am

Investing can often seem like a labyrinth of choices, risks, and uncertainties. However, despite ever-changing financial markets, there are a few timeless truths that can guide both novice and seasoned investors.

Here are three investment truths I know for sure:

  1. Diversification is key

One of the most fundamental principles of investing is diversification. The age-old adage, ‘Don’t put all your eggs in one basket,’ holds especially true in the world of investments. Diversification involves spreading your investments across various asset classes, industries, currencies and geographical regions to reduce risk.

By diversifying, you minimise the impact of a poor performance in a single asset or sector. For example, if you invest solely in tech stocks and the tech sector crashes, your entire portfolio could suffer. However, if your investments are spread across tech, healthcare, real estate, and bonds, the decline in one sector may be offset by gains or stability in others.

Diversification also typically leads to more consistent returns over time. While some assets might underperform, others could outperform, balancing the overall performance of your portfolio.

Plus, investing in a range of assets allows you to capitalise on opportunities across different markets and sectors which usually leads to discovering high-growth investments that you might have missed with a concentrated portfolio.

  1. Time in the market beats timing the market

Attempting to predict market movements and time your entry or exit points can be incredibly challenging and often leads to suboptimal results. A more effective strategy is to stay invested for the long term.

The power of compounding

Compounding is the process where the earnings from your investments generate additional earnings. The longer you stay invested, the more your investment can grow exponentially. For example, investing £10,000 at an annual return of 7% will grow to approximately £76,000 in 30 years, thanks to the power of compounding.

By staying invested, you allow your investments to ride out short-term volatility and benefit from long-term market trends. Historically, markets have tended to rise over the long run, despite periodic downturns.

Avoiding emotional decisions

Trying to time the market often leads to emotional decision-making, where fear and greed drive your actions. This can result in buying high during market euphoria and selling low during market panics.

A disciplined approach where you invest a fixed amount regularly regardless of market conditions, can help mitigate the impact of market volatility and take advantage of lower prices during market dips.

  1. The value of working with an advisor

Facing the complexities of investing can be daunting, which is why working with a financial advisor can be incredibly beneficial. A skilled pro can offer expert guidance tailored to your specific financial situation and goals.

They can help you create a customised investment strategy based on your individual risk tolerance, time horizon, and financial goals.

Financial advisors bring a wealth of knowledge and experience to the table. They stay updated on market trends, investment strategies, and regulatory changes, helping you make informed decisions.

Also, an advisor will offer an objective perspective, helping you avoid emotional decisions that could negatively impact your investments.

Investing is not a one-time activity but a continuous process. An independent professional will provide ongoing support and adjustments to your investment strategy as your financial situation and goals evolve over time.

Look for expert credentials to ensure they have the necessary qualifications. Ensure the advisor has a fiduciary duty to act in your best interests, and consider their experience, fee structure, and the range of services they offer.

After years of working across the globe with clients, I know for sure that understanding and applying these principles can be the difference between a successful investment journey and one fraught with unnecessary risks.

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