Metis AM
If you want to reach your long-term goals, investing can be a great way to build your wealth. This is especially true when low interest rates mean that your cash savings aren’t working very hard for you.
On the face of it, investing seems relatively straightforward – you just need to do some careful research, buy stocks which you think have good growth potential, and then sit back and wait.
Of course, things are rarely so simple in practice as they are in theory. That’s why, if you want to get involved with the stock market, read on to find out the five key steps to building a successful investment strategy.
1. Define your goals
When you invest, one of the most important steps is to ask yourself what you’re building your wealth for. Having a clear picture of what your ultimate goal is can help you to more effectively create an investment strategy that’s right for you.
For example, common reasons may include:
- Buying a property
- Accumulating wealth to invest in a company
- Paying for a child or grandchild’s education
- Giving your loved ones a comfortable lifestyle
- Funding your desired retirement.
While it may seem simple, this can often be the most important part of your investment journey, as it influences many other decisions you’re likely to make.
2. Know your timescale
Once you know what you’re investing for, you can have a better idea of the timescale you’re going to need. This is known as your “investing horizon” and can be helpful for informing decisions about risk.
For example, if you’re building your wealth for a comfortable retirement, you may have several decades to work with. On the other hand, if you’re investing to help a loved one get onto the property ladder, you’re probably going to have a shorter timescale in mind.
As a general rule, if you have an investing horizon of less than five years, it can be sensible to choose less risky investments. This is because safer assets will be less affected by market volatility if there is a sudden economic shock.
On the other hand, if you plan to invest for a longer period, you can afford to take more risks with your wealth, as the upward trend of markets will often mitigate any short-term volatility.
3. Understand your attitude to risk
When it comes to building a portfolio, your choice of which assets to buy, and funds to invest in, should be based on how much risk you’re willing to tolerate to achieve your goal.
To put it simply, investments with a higher risk often have the potential for higher returns. But, as you might imagine, they can also fall further in value in the event of a market downturn.
For example, government bonds (known as “gilts”) are considered one of the safest investments but they also typically offer smaller returns than a corporate bond might.
Of course, over time your attitude to risk is likely to change. While you’re in the “accumulation” phase of your investing journey, you may be more willing to take greater risks but might prefer to play it safe as you approach your retirement.
In the same vein, it’s also important to understand your capacity for loss, which is essentially how much wealth you could tolerate losing without it affecting your standard of living.
4. Diversify your assets
To put it simply, diversifying your portfolio is the act of not putting all of your eggs in one basket. By spreading your investments out across a range of asset classes, markets, and geographic areas, you can help to reduce your overall investment risk.
The benefit of doing so is that if a particular market or sector experiences a downturn, only a small portion of your wealth may be affected. Furthermore, by spreading your money around in this way, there’s a good chance that a loss in one area could be offset by gains in another.
This can help to protect your portfolio from sudden market shocks and give you much greater peace of mind to know that your progress towards your goals won’t be affected by short-term volatility.
5. Work with a planner
When it comes to building wealth through investing, it’s essential to be able to make properly informed decisions with your money. This is where seeking professional advice can really benefit you.
When you work with a planner, they can act as a useful sounding board for any decisions you plan to make, helping you to decide whether it would be right for you. They can also offer useful insights that you may not have considered, helping you to grow your wealth more effectively.
For example, as we discussed in a previous article, a planner can help to ensure that your investing strategy is right for you in terms of exposure to risk.
Seeking professional advice can give you greater confidence when investing, and peace of mind to know that you’re on track to reach your long-term goals.
Get in touch
If you want to be able to make properly informed decisions when you invest, we can help. Please email enquiries@metiswealth.co.uk or call 0345 450 5670.
Please note
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
