The investment world can change dramatically from one month to the next. But these secrets of successful investors never go out of style.
Successful investing can be one of your biggest allies in the quest for long-term financial security. Unfortunately, unsuccessful investing can leave you wishing you’d kept your money in the bank.
So what are the secrets to making your investments achieve what you want them to achieve? Here are some of the tactics used by successful investors around the world.
1. Start with a plan
Smart investors don’t just look for ‘good’ investments. They look for investments that will help them achieve specific goals.
For example, you may be looking to achieve a better yield on your cash than you can with a term deposit. In this case, a high-yield share fund may be a good option. But someone who is mainly looking for capital growth may be more interested in a growth-style share fund that doesn’t focus on dividends.
2. Diversify widely
One of the main goals of investing is to ensure you have a mix of assets that are likely to perform well at different times – helping you survive any downturn in a specific market or industry sector.
While many Australian investors are heavily exposed to Australian shares, a well-diversified portfolio will generally hold assets in each of the major asset classes (e.g. Australian and international shares, property, fixed income and cash).
Tip: Exchange traded funds (ETF) make it extremely easy to diversify your investments as they can give you exposure to a whole index or asset class in a single investment.
3. Watch your costs
It’s easy to get fixated on the returns your investments can generate. But successful investors always keep track of, and seek to minimise, the fees and taxes associated with owning them.
A ‘buy and hold’ strategy can help you avoid transaction costs like brokerage, or buy and sell spreads from managed funds. It can also help you reduce capital gains tax, which generally decreases by 50% when you’ve held an asset for over 12 months.
4. Invest gradually
Attempting to time the market is a dangerous strategy that can increase the risks of investing, particularly if you invest all of your spare money at once.
A good way to manage the risk of a market downturn is to invest gradually over time. This allows you to average out the cost of your investments, making the timing of each transaction less important.
Tip: Most managed funds will allow you to set up a BPAY arrangement so can invest in a regular and disciplined way.
5. Don’t panic
When share markets retreat (which they inevitably do), smart investors don’t hit the panic button and sell long-term investments that are likely to bounce back at some stage.
Instead, if you continue to invest during a market downturn, you may be able to buy high-quality investments at a lower price than you could if you waited for markets to recover.
6. Protect your assets
Even the best investment strategy can come unstuck if you need access to your money in an emergency.
A smart strategy is to ensure you maintain a sizeable cash reserve, and put in place appropriate income protection and life insurance. Having the right insurances in place can help prevent the need for a ‘fire sale’ of your investments if you suffer a serious illness or accident.
Tip: Income protection typically replaces up to 75% of your income if you can’t work due to an illness or accident. The premiums for this type of cover are generally tax-deductible.