Rebecca O’Keefe is Head of Investment at Interactive Investor.
There are plenty of ideas and guidance provided for novice investors which typically revolve around standard rules such as ‘invest regularly’, ‘don’t panic when things go wrong’, ‘invest for the long-term’ etc. – all of which are perfectly reasonable tips and not just for when you’re starting out.
But what if you’ve already built a sizeable portfolio and are a more experienced investor? What can you do to ensure that you’re making the most of your money?
Invest upside: Quite often investors are told not to invest if they can’t bear the thought of losing money, but the reality is that you are far more likely to lose money if you aren’t investing
Take enough risk
Quite often investors are told not to invest if they can’t bear the thought of losing money, but the reality is that you are far more likely to lose money if you are not investing.
Of course, investing does involve ups and downs, but with cash earning next to nothing at current interest rate levels, your spending power is reducing each year in real terms.
If you don’t need the money in the short or medium term then not taking any risk is likely to be far more detrimental to your long-term wealth than taking the plunge.
If you’re investing in your pension it is even more essential to embrace opportunities when they arise.
Pension freedoms have changed the way we manage our retirement pots.
For example, more investors than ever are choosing to manage their portfolios across twenty years or more of retirement, rather than buy an annuity as soon as they retire.
This means that even if you are in your 50s or 60s, if you are going to choose to manage your pension pot after you retire and drawdown your income yourself, you potentially have thirty years or more to invest.
This could allow you to take a bit more risk with your investments.
Knowing when to sell
One of the most difficult decisions you have as an investor is knowing when to sell.
This is not an issue for one of the smartest men in the market, Warren Buffett, who suggests that his favourite holding period is forever, but most of us are likely to think about selling some of our holdings at some point.
Obviously, one of the golden trading rules is to avoid making rash decisions to sell if the going gets tough.
Most down days in the markets are followed by a rebound and it can be easy to overreact if your investment isn’t going as well as hoped.
However, in normal market conditions you may be looking at your holdings and wondering if now is the right time to sell.
Margin call: One of the most difficult decisions you have as an investor is knowing when to sell
The psychology of selling is very different depending on whether you’re sitting on a profit or a loss, but either way the results of selling too soon or refusing to sell at a loss can mean you lose out.
Investors who have made a large amount of money on a trade may be tempted to bank their profits early, so check your logic to make sure that the tide has turned before you cash in a winning position.
If you’re on to a good thing then the objective is to make as much money as you can.
Obviously, it is better to take some money off the table than to see all potential profits disappear, but investors typically don’t embrace their winners for long enough and miss out on some of the potential upside.
Those who are sitting on a loss typically find it difficult to acknowledge they might have got it wrong and, from a psychological perspective, crystallising losses just feels so much harder to do.
Worse still, many investors continue to buy on the way down, adding to a losing trade rather than re-evaluating whether you might have got it wrong.
If you have good reasons to invest in a stock and those fundamentals still exist, then riding out any downturn is reasonable.
However, if circumstances have changed, taking the hit and putting your money to work in other more potentially lucrative investments might be a better strategy.
Trying not to get too emotional or too attached to your holdings is key.
The objective when investing is to make money, but it is also about cutting your losses when you need to.
Inside track: By switching utility company you have information on them, potentially well before a company updates the market on their prospects
You know more than you think
Are you a compulsive ASOS user?
Have you switched your supermarket; broadband provider; utility company etc?
What you, your friends and your family are doing may well be part of a wider trend that affects a company’s overall fortunes.
You have that information, potentially well before a company updates the market on their prospects, so use that information to your advantage.
A number of years ago, I walked into a well-known retailer and there were so few people there and limited things I wanted to buy, my first thought was that I wouldn’t want to be one of their investors.
Two weeks later the company issued a profits warning.
More recently, my eldest son came home waxing lyrical about a night out at a large Wetherspoon’s pub which was packed with hundreds of people, all eating and drinking till the early hours.
Last week, their share price soared on better than expected results.
You won’t necessarily always get it right, but use what information you have to your advantage.
Favoured tipple: My eldest son came home waxing lyrical about a night out at a large Wetherspoon’s pub which was packed with hundreds of people, all eating and drinking till the early hours. Last week, their share price soared on better than expected results
Paying attention to the world around you can be a very lucrative strategy.
Think about the whole chain
This one may seem a bit random, but it really does make sense to think about the whole supply chain or wider market when it comes to investing in a sector or stock.
For example, drinking habits have changed significantly over the last few years and one of the major beneficiaries has been gin producers.
Distilleries have seen demand soar, but in terms of share price rises, the huge winner has been Fevertree Drinks.
It cannily tapped into the premium mixer market and has gone from strength to strength, with the share price up 12-fold in three years.
Apple is one of the largest companies in the world and early investors have made a fortune, but so have investors in some of their suppliers.
IQE has seen its share price soar this year on investor speculation that its technology was being used in the new iPhone.
However, one word of warning when you’re investing in a company that has most of their profits tied up in supplying one company.
Circumstances can change and you may suddenly find yourself out in the cold.
Money maker: Apple is one of the largest companies in the world and early investors have made a fortune, but so have investors in some of their suppliers
Imagination Technologies ran into this issue when Apple suddenly announced they had lost their contract.
Be tax efficient
Many people view ISAs as relatively mundane when it comes to the tax breaks – and it is true that over a single year the upside is relatively limited.
But when it comes to investing in your ISA over the longer term, things become far more attractive.
Remember that all income paid to you from your ISA is received with no further tax to pay, whatever your tax status, and it is also non-declarable so it doesn’t affect any other income or credits you might be getting, such as child benefit.
Being able to earn a significant non-declarable income after several years (or decades) of ISA investing is well worth it.
When it comes to pensions, the benefits are even more compelling if you can afford to wait until you are at least 55.
A higher-rate tax payer only has to contribute a net payment of £60 to have it topped up to £100 by HMRC.
This is a huge rate of return before you’ve even started investing.
Basic rate taxpayers who are paying 20 per cent tax rate have to contribute £80 to receive the £100 gross amount.
Nest egg: When it comes to investing in your ISA over the longer term, things become far more attractive
If you’re a member of a company scheme and they will match your contributions, then it is even more essential to participate.
One hundred pounds a month from both you and your employer costs you just £60 or £80 depending on your tax band and will be worth £200 every month.
You really are throwing money away if you don’t take advantage of this tax break, so long as you’re not likely to breach any lifetime limits.
Check your charges
Are you a Meercat movie goer?
Do you check for discount vouchers before you go out to eat?
Have you changed your utility or broadband provider to save money?
If so, you’re on your way to a good savings habit.
However, when was the last time you worked out how much you were paying your investment provider?
The compound effect of an extra 0.5 per cent charge a year can be significantly deleterious to your long-term wealth.
Hard currency: Having a currency view, whatever type of investor you are, is more essential now than ever
If you invested £5,000 a year into an ISA with a return of three per cent
per annum, after 25 years your investment would be worth £187,765 with no annual charges, £184,119 if you paid £100 a year in fees and just £175,059 if you paid 0.5 per cent per annum in fees.
So, analyse whether you’re paying too much for your provider – and remember, just because you started with one platform doesn’t mean you’re committed to them forever.
Loyalty isn’t necessarily rewarded in the way you want – and transferring may be highly beneficial to your long-term wealth.
Reinvest your income
If you don’t need it, don’t take it.
The beauty of reinvesting dividends and income you make is that the compound effect of this reinvestment will genuinely make a huge difference to your long-term wealth.
The Barclays Equity Gilt Study 2017 confirms that if you had invested in UK equities at the end of 1945 and reinvested all dividends as they were received until the end of 2016, after adjusting for inflation your portfolio would be worth over 20 times more than if you had taken the cash instead.
Obviously, you may need the income, but if you can afford to wait, it is likely to significantly improve your prospects if you choose to reinvest what you earn.
Understand the currency effect
Buying British: If you think sterling is going to strengthen then you might consider more domestically focused companies such as WM Morrison
We may not want to be currency traders, but the increasing impact that currency markets have on stock market returns cannot be understated.
Having a currency view, whatever type of investor you are, is more essential now than ever.
The UK companies likely to benefit most from the weak pound are the international giants such as HSBC, Glencore and Shire, who earn most of their revenues overseas.
If you think sterling is going to strengthen then you might consider more domestically focused companies such as Standard Life, WM Morrison and Saga.
Fund investors also have the option to take a view on currencies in most markets by choosing between normal ‘unhedged’ funds and equivalent funds which are ‘hedged’ against currency moves.
This is not the same as a hedge fund, but instead is where a fund manager strips out their exposure to the currency and leaves you with just the underlying equity return (plus or minus the costs of hedging).
There is no easy path to investment success, but knowing what your investment goals are and why you’re investing is essential.
There is a wealth of online research and information that is increasingly accessible for private investors and this can supplement any ideas you might have, so use the tools and information offered.
Create good habits and review your portfolio regularly to keep on top of any changes.
But above all else, have conviction, pay attention and you’ll be well on the way to a more secure financial future.