In this article, we have provided some expert investing tips to help you maximize your returns and minimize risks.
1. Define Your Goal
Whether your investment goal is to purchase a home or save up for retirement, understanding your goal will help you structure your investments more wisely.
Head of financial planners at the investment platform Vanguard, James Norton, advises that if you have a short-term goal, you should consider lower-risk investments - volatility is your worst enemy. On the other hand, if you've got a long-term goal, for example, saving up for retirement, you can manage a higher level of risk since you can wait out the market volatility.
For more information, check out our article on how investment portfolios can vary based on your goals and risk tolerance.
2. Take advantage of tax wrappers
Tax wrappers allow you to safeguard your investments against taxes that can eat into your returns.
Pensions and Individual Savings Accounts (Isas) are the two most popular tax wrappers.
With an Isa account, you can enjoy tax savings of up to £20,000. Here are the different types of Isa:
- Lifetime Isas
- Stocks and shares Isas
- Cash Isas
- Junior Isas
A self-invested personal pension (SIPP), or a personal pension, allows you to enjoy tax relief on contributions of up to 100% of your yearly salary (capped at £40,000 per tax year).
3. Have realistic expectations
A survey conducted by pension and investment provider Aegon involving more than 1,000 respondents found that the majority of investors, mostly young investors, have unrealistic expectations in terms of returns on their investment. 19% of 18-34 years olds expect yearly returns of 10% and above.
But in reality, most investments have a much lower rate of return on investment than this. Even though you should always aim high, you shouldn't base your spending on the expectation that you will achieve a high level of income from your investments.
4. Look out for hidden charges
You should expect to incur some fees and charges when investing. Besides the fee that you pay to the platform you are using, there may be other fees such as performance fees, trading fees, and management fees. These can significantly impact your earnings in the long term.
To put things into perspective here's how these charges can affect a £50,000 investment - assuming a 5% average yearly growth:
Earnings after 10 years
Earnings after 20 years
Earnings after 30 years
As you can see, while a charge of 1% might not seem like a large amount, it can eat up over £7,000 in returns.
One important thing to keep in mind is that higher platform charges don't always mean a higher level of return in investment.
5. Look out for scams and hot trends
There is nothing more exhilarating than investing for the first time. However, you need to be careful not to be swept up in the hype of investing in 'flavor of the month' stocks.
For instance, while cryptocurrencies like Bitcoin are very popular, they are extremely volatile. In December 2021, the Bank of England warned that Bitcoin could lose its value leading to investors in the digital currency losing all their money.
There is no shortage of scams in the cryptocurrency market. According to the Action Fraud report data, £146,222,332 was lost between January and January 2021 as a result of cryptocurrency fraud.
When it comes to investing, one of the most important things to keep in mind is that it comes with its own fair share of risks. Avoid any ads claiming to deliver guaranteed high results. don't forget, it looks too good to be true it probably is.
6. Diversify your portfolio
When it comes to investing, you should never put your eggs in one basket. Investing your money in one single stock means that in the event of one negative company-specific issue, you could end up losing a lot of money. Diversifying your portfolio allows you to minimize your risk.
Purchasing a fund is one of the easiest and cheapest ways to diversify your portfolio. A fund typically contains dozens and even thousands of holdings minimizing the impact of poor performers on your overall portfolio.
Another great way to diversify your portfolio is to minimize exposure to a specific sector or geographic region. Most investors are prone to 'home bias'. For instance, if you primarily invest in the UK stock market (which accounts for less than 5% of global market indices) you are potentially missing out on numerous high-performing markets such as the US tech sector. Here are three reasons to invest in Asia.
7. Do not panic
Given the volatility of the market, investing in them can be a bit scary. As a result, the immediate reaction for most people when the market falls is to sell.
However, what most people don't take into account is that the market always recovers. This means that those who sell early miss out on the potential gains when the market gains.
According to findings by Quilter, an individual who invested £100,000 at the start of 2020 saw their investment drop to less than £78,645 due to the pandemic.
However, if they rode out the chaos until May 2020, they would have seen their investment recover up to £98,159.
Andy Russel suggests that if you are investing for a decade, you should learn to tune out the noise - don't be triggered by a short-term drop in the value of your investments. The same goes for property investment, keep an eye on online estate agents to find investment worthy property.