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Five principles for good investing

Becks Nunn

Becks Nunn - Fidelity International


It’s said that knowledge is power. And that’s especially true of investing. So, whether you’re investing through a pension at work, a self-invested personal pension (SIPP), a stocks and shares ISA, investment account or a junior account… there are things you should know which will help you become a better investor. 

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 - can make your money work harder over the long term.

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. Charges would also apply and reduce any returns.

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 is the power that investing earlier rather than later can have. 

And once you’ve started investing, keep your eyes 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 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. Be tax-efficient 

No one wants to pay more tax than they need to. So, our second principle is all about being as tax-efficient as you can be. There are a number of ways to save - or invest - tax-efficiently.

Pension - a pension (whether it’s a workplace pension or SIPP) is one of the most tax-efficient ways to save for your retirement. Not only does the government top up any eligible contributions you make (otherwise known as pension tax relief), but the value of your investments can grow tax-free. And when it comes to taking an income from your pension, you can normally take up to 25% tax-free, if this amount is not higher than your remaining lump sum allowance. 

Stocks and shares ISA - this allows you to save up to £20,000 this tax year without having to pay any capital gains or income tax on any returns. Unlike your pension, you can access your savings in an ISA at any point, so it’s useful if you’re saving for medium-term financial goals like a wedding, or holiday of a lifetime. 

Junior accounts - if you’ve got children, there are two ways to invest tax-efficiently. A junior ISA allows you to save up to £9,000 in 2024/2025 without paying any income tax or capital gains tax on your investments. The child can access this money when they turn 18.  A junior SIPP allows you to invest up to £2,880 a year and the government will add £720 basic tax relief (20%) taking the total up to £3,600. The child won’t be able to access this money normally until they’re 55 (57 from 2028). Eventually, withdrawals from a junior SIPP could be subject to income tax.

Tax treatment depends on individual circumstances and all tax and pension rules may change in the future.

3. Invest regularly

There are a couple of reasons why investing regularly is a good idea.

It can take the emotion out of your decisions - investing can play havoc with your 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 for investing success you'll probably need to keep investing - and stay invested - when the going gets tough. 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 (something that even the experts find hard to do).

It averages out the price you pay for your investments - let’s say you pay into your pension each month. This is a regular payment and sometimes you’ll get more 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.

4. Manage risk 

Investing comes with risk. The higher risk, the higher the potential returns. The lower the risk, the lower the potential returns.  It’s important that you understand what risk means and take risks that you’re comfortable with.

When thinking about the level of risk you’re willing to take, remember to factor in inflation - particularly when thinking about your pension pot as it can erode the buying power of your money over time.

Risk typically is associated with a type of investment (such as cash, bonds or equities) but the country, continent and industry sector also affect an investment’s performance. It's much better to hold a mix of investments (the technical term for this is a diversified portfolio). Some will perform well at a time when others don't do as well, so they help to balance each other out to potentially give you a smoother ride over time.

5.  Make it last 

If you’ve got a defined benefit pension scheme, you’ll get a guaranteed income for life. 

On the other hand, if you’ve got a defined contribution plan, you’ll need to think carefully about how you’re going to make your pension last as long as you do - which could be thirty years or so. 

Here are a couple of things to think about. 

How much you withdraw - 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 take 4% income out of your pension pot each year and leave the rest invested, your pension pot should last as long as you need it to. To put that into context, if you need an income of around £40,000 a year, you’ll need to have saved a £1m pension pot.

The when is important - you need to think very carefully about when you access your pension. If you start to sell your investments when the price is low, you'll have to sell more of them to get the income you want (leaving less of your pot 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 best to have a plan B so that 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) or even an annuity to fall back, you should be able to take back a bit of control. 

Important information: This is for information purposes only and the views contained are not to be taken as advice or a recommendation for any product, service or course of action. If you’re unsure about the right approach for you personally, you should speak to an authorised financial adviser.

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