Five principles for good investing

Important information - investment values and income from investments can go down as well as up, so you may get back less than you invest.
 

They say knowledge is power.

And that’s especially true for investing. So, whether you're investing through your Retirement Savings Plan at work, or another investment product, there are things you should know which will help you become a better investor. Understanding the basics of investing will help you build a closer relationship with your savings and will help you when thinking about your goals and priorities in the lead up to retirement.

Here are five principles that can help you make smarter investing decisions.

1. Start investing

Time is one of the most important factors in investing. The longer you invest for, the more opportunity there is to benefit from the stock market’s long-term growth potential. Of course, there are no guarantees, but starting earlier - rather than later - gives your money longer in the markets to potentially grow.

Take the example below - which is for illustrative purposes only. In reality, investment values can fall as well as rise rather than give a steady return. It also doesn't take the impact of inflation or any charges into account, so may not reflect the actual future outcome.

Petra starts investing £1,000 a year at 25 years old, while Jonathan invests the same amount from the age of 35. By the time they both reach 65, not only does Petra have significantly more money, she also stopped paying in at the age of 55. This shows the impact of starting to invest early rather than later.

And once you’ve started investing, keep your sights set on the long term (at least five years). Markets rise and fall and that’s quite natural. So, it can pay to stay invested as history shows that markets can recover over long periods of time. It’s important to remember that the value of investments can fall as well as rise and you may get back less than you invest.

2. Invest regularly

There are a few reasons why investing regularly could be a good idea.

It can take the emotion out of your decisions - investing can stir our emotions and that’s largely down to something called loss aversion (which basically means that we fear losses more than we appreciate gains).

To maximise your long-term chances of investing successfully you'll usually need to keep investing and remain invested even when things feel uncertain. When our investments lose value, this can be hard as it's natural to want to sell or not to invest more. And yet a market dip can often be a good time to invest in the long run as buying prices are lower. By investing regularly, you're less likely to try and time the market, which can be tricky even for the experts.

It averages out the price you pay for your investments - let’s say you invest £100 each month. This is a regular payment and sometimes you’ll get more investments for your money and sometimes you’ll get less. It all depends on what the markets are doing. But, over time, the idea is that the price you pay averages out. Knowing this can help remove the temptation of trying to time the market.

3. Manage risk

Investing comes with risk. Higher risk can mean higher potential returns. Lower risk often means lower potential returns. It’s important to know what risk means and only take on what you’re comfortable with.

When thinking about the level of risk you’re willing to take, remember that inflation can reduce your money’s buying power over time.

Different types of investment, like cash, bonds or equities, carry different levels of risk. Where you invest also matters, such as the country, region or sector. It’s often better to spread your money across different investments, known as a diversified portfolio. Diversification can help manage risk, but it can’t remove it. Some investments might do well when others don’t, which may balance your returns over time.

4. Make it last

There are different ways to access your savings. These depend on the rules of your Plan and whether you leave your employer, retire or complete an international secondment.

Knowing how you want to use your savings at that point will help you decide on your investment options. Even if you are able to access your savings earlier, it’s important to think about your long-term future goals to ensure you stay on the right track.

Managing your income in retirement - you need to be realistic and work out how much money you need to enjoy your retirement. The widely used 4% rule (also known as the Bengen rule) says that if you withdraw 4% of your retirement savings in the first year and then increase that amount each year in line with inflation, your savings may have a better chance of lasting for at least 30 years. However, this is only a rule of thumb and isn’t guaranteed.

Timing matters - you need to think very carefully about when you access your savings. If you start to withdraw your savings (which involves selling investment units) when the price (the value of each unit or share in your investment pot) is low, you'll have to sell more of them to get the income you want. This will leave less of your savings invested. On the other hand, when the price is high, you'll sell less which leaves more of your money invested - and gives your investments a greater chance of growing in your retirement. It’s wise to have a plan B so you’re not forced to sell when markets aren’t doing well. If you can be flexible (either by having some cash reserves or other investments you can dip into), you should be able to take back a bit of control.

5. Make the most of your Retirement Savings Plan

Alongside time and how your investments perform, how much you put aside matters. Here are some ways to make the most of your contributions and increase your chances of investment success.

Your employer might match your regular contributions

Some employers increase their contributions if you increase the monthly amount you put aside as well. This tends to be a direct match – if you put aside an extra 1%, they add an extra 1%, but there will be a maximum level they will match. For more information and to understand if this applies to your Plan, please see the Your Plan Explained document on PlanViewer.

Consider making extra one-off contributions when you can

You may be able to make one-off contributions to your Plan – for example, from a work bonus. You’re unlikely to have these matched by your employer, but there may be other benefits depending on the country where you work and your employer.

Find out more about how contributions work in your Plan by logging into PlanViewer and reading the Your Plan Explained document.