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3 Fundamentals of a sound investment strategy

By David Norton - September 19, 2014

Every investment strategy needs these 3 things

There are infinite ways that your money can be invested. The building blocks of a financial plan for a life event, however, should be nice and simple.

You want to invest your money in a manner which achieves your investment goals and objectives, however the finance industry has made literally trillions on complicating this process to the point that investors are terrified of it, and the proverbial one eyed man can make a lot of money at the expense of the blind.

Fear not. It can be broken down and understood in some very simple concepts, which are proven to work:

1. Think long term

The accepted wisdom is ‘time in’ not ‘timing’.  This way, you minimise the harmful impact of markets. No-one can time the markets consistently, no-one has a crystal ball, but markets are what drive return. You need to stay invested for the long term.

The 3 Fundamentals of Investing

A recent study by Fidelity found that the best performing accounts they held…were held by people who’d forgotten they held accounts! Having left their accounts alone for years, they outperformed everyone.

2. Compounding

Combine a long term approach to investing, with Albert Einstein’s 8th Wonder of the World – compounding.

This uses your money, to make more money on your behalf, without you doing anything!

To highlight its effectiveness, imagine a 7% (net of all fees) annual return against £250,000. That’s £17,500 every year. If you take that return and spend it at the end of the year, for 10 years, that’s £175,000 you have made in total over the years. A very good investment return.

If you left that £17,500 invested instead of spending it, the effect of annual compounding would mean your final figure is much, much higher - £491,787. That’s £241,787, or nearly doubling your money. The affect of compounding is very powerful, and under-utilised by the private investor.

3. Use professionals who know about asset allocation

As I highlighted in a previous blog, Avoid These Common Mistakes Other Investors Make, the average investor (which is most people) make many common investment mistakes which can really damage return. The Fidelity study discovered that the returns achieved by the "average investor" were 4th from bottom out of 44 different sectors (annualised average returns over 20 years 31/12/1993 – 31/12/2013).

You must have the appropriately targeted asset allocation, run by a professional investment adviser. The appropriate asset allocation is based on a combination of your life goals and your appetite for investment risk.

Only a highly competent, credible, and experienced investment professional should invest and manage money. Fund and discretionary managers invest according to specific strategies – you need the one which matches your needs, and then let the managers do the work. They know how to use equities to drive growth, bonds to protect against volatility, cash for safety and other asset classes, to tweak investment risk appropriately.

A key point here is that the wrong asset allocation will result in an unhappy investor. Your investment professional will run the asset allocation, but your financial adviser should uncover your objectives and appetite for investment risk, and match these with the right asset allocation.

I’m not suggesting you forget about your investments, or that you never change your portfolio. There are times to switch your investments, but these times revolve around your objectives and changing appetite for risk.

Follow these 3 fundamentals, and your investment portfolio will be well set.