Investing presents a conundrum. It is both a way to grow your wealth and a way to lose money.
It is true that you could invest money in a company or fund and the value could fall. If you sell when the value of your investment has fallen, you will have lost money.
You can make rational decisions that make investing less of a risk.
Lets get back to basics.
If you owned a company that produced only snow shovels, you’ll get customers when it snows.
If you owned a company that produced snow shovels and sun hats, you’ve diversified your business. You have something that will sell in the winter months and something that will sell in the summer months.
What would be even better is if you owned a company that produced snow shovels, umbrellas, gloves, sun hats, wooly hats, ice cream, sun cream, t shirts, etc. That way, you’ll have a product that people need, whatever the weather.
You should look at investing in the same way. It may be tempting to invest in a company that you like the look of or recognise, or to invest only in UK funds, but this doesn’t help you diversify.
I’m pleased with the performance of my UK fund at the moment, around 20% over the last 2 years. However, I’ve had over 40% growth from a US and a Pacific fund, which I wouldn’t have, had I stuck rigidly in my comfort zone.
I drip feed my investments to smooth out market volatility. It basically means not paying a shed load of money in on a good day, only to lose a huge swathe of it’s value the next.
Say you had £100k (I don’t, by the way, but lets do some wishful thinking!), if you invested it all on the same day and the market nosedived tomorrow, your 100k will obviously fall and it can take a long time to recover.
However, if you ‘drip fed’ £5,000 per month for 20 months, you might have bought at some high points and some low points, so this smooths the risk too.
Don’t be blinded by past performance
It is easier said than done not to get carried away and invest in a fund that is doing phenominally well. It could be a brilliant move, or you might have missed. the boat.
I made this mistake 18 months ago by investing AXA Framilgton Biotech. It was all the rage on Money Saving Expert and had grown by something like 40% in one year and 30% in the following year. I was hooked. I invested a lump sum and almost straight away, the fund value dropped. Over the time, the fund value has been worth around 16 to 25% less than what I bought at.
I have hung tight- selling low is a bad move- and it has paid off as the fund has recovered and is starting to grow a little. Had I not gotten carried away by what everyone was talking about, I would have chosen a more boring, practical choice and more than likely grown my money much more.
Don’t try and time the market
I was nervous about investing when the stock market was so high, but followed the advice that time in the market is better than timing the market, and it’s really paid off. Investing should be seen as a long term endeavour. In the words of Warren Buffett:
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
Follow the advice of Warren Buffett
Warren Buffet knows a helluva lot more about investing than me. When I’m on the verge of an irrational investing decision, sage advice from Warren Buffett has a habit of changing my mind.
Do you have other ways for reducing risk in your investment portfolio?