Investments

A Short Guide to how Investing Works

A Short Guide to how Investing Works

This content is for information and inspiration purposes only. It should not be taken as financial or investment advice. To receive personalised, regulated financial advice regarding your affairs please consult an independent financial adviser.

Perhaps you are just beginning your journey of understanding what investing is and how it works. Or, perhaps you are looking for a useful resource to provide to such a person. If so, this short guide is for you.

Here at Cedar House, our financial advisers have been assisting clients with their investment portfolios for many years. We offer some of our insights and experience here, hoping it will help you. If you would like to know more or discuss starting your own investment strategy with us, then do get in touch to arrange a free consultation:

enquiries@cedarhfs.co.uk or 020 8366 4400

 

What Investing is

At its core, investing is mainly about putting your money towards certain financial products, intending to make more money over time.

These financial “products” might include a range of options within an investment portfolio such as bonds, property, cash or mutual funds. You might commit money towards these products via one big lump sum, through multiple lump sums or by drip-feeding into them over the years.

 

What Investing is not

Many people confuse investing with gambling. After all, both seem to involve taking risks with your money. In one case, you put money on the table, roll the dice and hope that the right numbers come up so you can take back more. In the other case, you seem to be putting money onto “multiple tables” in the hope that they also bring back more than you put in; except with investing, the “tables” take the form of mutual funds, bonds and so forth.

This is a common misconception and it’s important to distinguish between gambling and investing, in at least three crucial ways:

  • Information. Investors have the ability to look at the past performance of a particular investment, and factor that into decisions about committing capital. Gamblers do not have access to any such information. Each “hand” on the blackjack table is down to chance and is not affected by what happened on the table one day, week or year before.
  • Loss mitigation. If you go “all-in” during a poker game and lose the hand, then your money is gone. With investing, however, your investments might go up and down over time, but you have not actually lost any money until you withdraw the capital at a lower price than you initially purchased it. Investors can also minimise their chances of experiencing losses through mitigation strategies (e.g. diversification; discussed below).
  • Time. A game of Blackjack or poker can last for several hours, but once the game is over you have lost your chance to make any further gains. Investing, however, involves committing capital to financial products over many years or even decades.

Principles for Good Investing

There are many principles and approaches you can discuss with your financial adviser when it comes to constructing a strong investment strategy:

  • Establishing risk tolerance. Some people are willing to stomach a considerable level of investment volatility and risk, whilst others will want to be more conservative. It’s important to be honest with yourself at the outset about your risk tolerance. Not only will this make your investment experience more enjoyable; it will help to prevent you from making impulsive investment decisions later on.
  • Take a long term view. A good investment strategy will likely span 10, 20 or 30+ years to give your investments plenty of time to grow, and recover from market downturns.
  • Diversify. If you put all of your money into one company or fund then your risk of investment loss is going to be quite high (think of the Woodford Fund disaster in 2019). However, spreading your capital across multiple funds, markets and asset classes can mitigate your risk of loss, “cushioning” your portfolio when one part of it suffers.
  • Review and rebalance. It is important to keep track of how your investments are performing, and occasionally rebalance it to ensure everything is staying on course towards your financial goals. It might be that a fund’s “fundamentals” are no longer sound, for instance, and so you could consider moving to a better one(s).

How to Start Investing

It is possible to start investing on your own via a range of online investment platforms. In our experience, however, most people will encounter more success, less risk exposure and greater tax-efficiency by consulting an independent financial adviser about their investment strategy.

A good example of how an adviser can add value to your investments concerns management fees. When you invest in a fund, the fund manager will usually charge you an annual fee to oversee the investments. Sometimes these fees can be quite high, which then eat into your investment returns. An independent financial adviser, however, will be able to help you survey the wider market and find the best deals for your portfolio.

Also, importantly, a financial adviser can provide a valuable “sounding board” for you to express any concerns you might have about your investments. Having an experienced professional at hand to listen and offer their perspective can be a valuable protection against you making rash, ill-informed decisions during times of market volatility.

Be careful not to overestimate your own ability to handle the emotions of market volatility. Even the most experienced investors can succumb to impulses which cost them dearly later!

If you would like to know more about investing or to discuss your own investment strategy with us, then do get in touch to arrange a free consultation:

enquiries@cedarhfs.co.uk or 020 8366 4400

 

 

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