Wealthify won Best Investment Platform for Beginners at the YourMoney.com Investment Awards 2024, a year after scooping the title of Best Overall Investment Platform in our 2023 awards.
As part of YourMoney.com‘s special award winner spotlight series, Colleen McHugh, chief investment officer at Wealthify, explains the core investing strategies all beginners need to know about.
Regardless of how you choose to invest, understanding some of the basic principles and strategies can help you do so with more confidence.
As is the case with so many big life decisions, there’s no one-size-fits-all solution when it comes to modern-day investing.
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Do you choose the DIY approach, for example – or let a professional take care of everything for you?
The good news is that there’s no right or wrong answer, simply because everyone’s individual situation, needs, and appetite for risk are different.
There are, however, key investment strategies and concepts that have not only stood the test of time but, in this digital age of instant gratification, are perhaps more important than ever. As with all investing, it’s important to remember that your investments can go down and up.
1. Diversification
Even though it’s impossible to completely eliminate risk when investing, there is a well-known way to at least spread it: diversification.
In simple terms, diversifying your portfolio means not putting all your eggs in one basket.
Why is this important?
Well, imagine if you invested in just one company; the success of your portfolio – and any potential investment growth – is relying solely on that company to do well.
As we know, however, the markets are like a rollercoaster, and can be impacted negatively by factors like news events, economic trends, and speculation. Meaning if that one company does perform badly, you’re essentially left with no back-up plan to balance out those losses.
Worse still, if you sell those investments when they’re down, you’re ‘cementing’ your losses and making them real.
And that’s the beauty of diversifying your portfolio with a range of global indices and assets like stocks, bonds, commodities, and property; any poorly performing investments could be balanced out by ones that are doing better.
So, to recap: the more you spread your risk, the less likely you are to lose all your money!
2. Active and passive funds
An investment fund is a bundle of different individual assets (stocks, bonds, property, etc.) that you buy all in one go. A cost-effective, popular way to invest, funds are an easy way to diversify your portfolio, as they spread money across different investment types and regions.
As the name suggests, active funds are actively managed by fund managers – and are a good option if you’re looking for higher-than-market-average returns.
Having spent a considerable amount of time analysing market data and researching companies, fund managers are looking to pick potential winners on your behalf that could outperform the fund’s benchmark.
Although potentially higher returns could be on the cards, this can never be guaranteed, as beating the market is never easy.
Likewise, having someone choose and manage your investments also means active fund charges may be a bit higher, depending on the provider you’re using.
If you’re looking for a cheaper option – one that doesn’t need as many analysts deciding what goes into them – then passive funds might be for you.
Rather than trying to actively find winners, passive funds are designed to mirror the collective returns of the market, minus a small fee. This is achieved by tracking a specific benchmark index like the UK’s FTSE 100 or the US’ S&P 500.
Say you invest in a fund tracking the FTSE 100.
Your returns aim to follow the performance of the UK market. So, if the FTSE 100 goes down 10%, your investment will likely fall at a similar pace, and vice versa.
As you can see, both have their pros and cons; ultimately, there’s no right or wrong choice, as it’s completely up to you.
3. Drip-feeding
Also known as pound cost averaging, drip-feeding simply refers to investing small-but-regular amounts of money over time. For example, if you have a direct debit set up to pay into your investment account every month, that’s drip-feeding.
The theory behind drip-feeding is that you remove any emotionally driven reactions to financial markets, by actively ignoring both the drops and gains.
Overall, by contributing regularly and automatically, it shouldn’t feel like you’re taking so much of a risk when you invest, as you’re not basing when you invest on what is happening with the markets.
4. Reinvesting profits
Investment profits often come in the form of dividends from stocks or interest from bonds; taking these profits and reinvesting them is a common technique used by investors, simply because of the potential it offers.
Because when you reinvest your profits, they could start making their own profits, which could then make more profits – and so on. This little trick – known as compounding in the investment world – could see your investments really start to add up over the long term.
5. Patience
They say patience is a virtue, but if you want to be a successful investor, it’s a necessity.
Regardless of how you invest, a solid strategy is nothing without being able to keep a cool head and stay the course! After all, the markets will go down as well as up – and it’s how you react to the drops that really matters.
Reacting with your heart is known as ‘emotional investing’, and something you’ll want to avoid.
Why?
Well, when you take out your money during a market downturn, the loss becomes ‘real’, meaning you’re more likely to lose any profit you’ve already gained.
You’ll also miss out on the market bounce when it recovers, which is usually when investors make the most profit. However, if you leave the money in and stick to your long-term strategic plan, any loss is just a number on a screen.
With investing, your capital is at risk, the value of your investments can go down as well as up, and you could get back less than invested.
The tax treatment of your investment will depend on your individual circumstances and may change in the future. ISA rules apply.
Wealthify does not provide financial advice. Please seek financial advice if you are unsure about investing.
Founded in 2016, Wealthify is your easy-to-use, online saving and investing service.
From rainy days to special days; unexpected bills to poolside chills; your financial piece of the pie to peace of mind: Wealthify is about so much more than just ‘putting money away’.
With a range of products for people at every stage and from all walks of life, it’s about the confidence that comes with being prepared for the worst – and satisfaction of knowing that building your future wealth is always for the best.
Using its simple, award-winning app or website, start from as little as £1 (£50 for pensions), then let it look after everything for you.
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