Christmas is behind us and the New Year is finally upon us. Happy 2022! Now you know what Iâm gonna start this year with. Investing, duh. See, new years’ resolutions are a funny way of setting yourself up for success. You list a whole bunch of things youâd like to achieve in the upcoming year.
And you soon find yourself disappointed at how little (if any) you’ve managed to keep. But I’m not surprised. Do we create any actual goals? With steps to make sure that we’re able to hit those dream resolutions? Nah. We just end up listing things weâd like to achieve. Zero roadmap. Been there, done that.
When it comes to our finances – and more importantly, investing, we all want to achieve more. So, Iâve laid out four (of the many) ways in which we can all become better investors. But donât be fooled. This stuff wonât happen overnight and (unlike our new yearsâ resolutions), we’re gonna be sure that these ones are going to have clear steps to help us get there! A set of clear instructions. Forget to do that and whoops, weâll be back to square one.
#1 Diversify
To start us off, Iâve picked diversifying your holdings as my #1. And youâll see why this is so important in just a sec! What we have experienced during the past couple of years (that really intensified during the pandemic) was a bull-run. But more specifically, a tech bull-run because not every sector (ahem, oil and mining) has been as lucky.
During Covid, from fund managers to retail investors (thatâs us lot) lapped up growth. They literally couldnât get enough of it. Unless of course youâre a UK investor (who loves income). Read here why the UK market has lagged behind the US and what that means for you as investors.
Nothing lasts forever
From where Iâm sitting, it looks like everyone is thinking (and hoping) that this tech glory (and its whopping earnings) will just continue till infinity. And beyond. But the tide always turns. Nothing can last forever.
In the late 60s, we had something kinda similar. Everyone was swallowing growth stocks (Xerox was our Tesla) but then came the mother-of-all bear markets. That lasted until the late 70s. And, when you adjusted it for inflation, it tuned out to be the was worst bear market since the Great Depression! OUCH. Now you see how important it is that you’re invested across many different areas. Incase one does pretty badly you wouldnât want it representing a massive chunk of your portfolio.
Diversification can be thought of in many ways but since Iâm a real foodie I like to think of it as a three-course meal. When you have a lavish meal, you donât just want to have some sides and a swanky drink. Youâll want the starters plus those juicy mains. And to finish off your meal, you’ll (or at least me) be wanting something sweet!
Now had you only had the savoury stuff it wouldâve been missing something. You want the sweet and the savoury. The crunchy and the soft. All these nuances bring the whole experience together. And itâs no different when it comes to your portfolio.
You want to be invested in different countries (from North America to Asia), different sectors (consumer, financials, tech ect) all of different sizes (from large caps to small caps). This will give your portfolio an edge. Itâll lower your overall risk (since youâre investing across hundreds of different stocks) and your volatility which means youâll be less likely to have those massive highs/lows. Itâll be a smooth(er) ride. Now, diversification is the only free lunch in finance. So pile it on! It’ll also make your investment ride a whole lot more interesting than if you were to be invested in one single country and one area only.
#2 Know your risk appetite
We all know that more risk means more reward but taking on too much risk (or little) can be dangerous. It goes both ways.
Letâs start with the first. If you find yourself constantly checking your portfolio (like several times a day) this could be a sign that youâve taken on too much risk. This could mean that your portfolio is too concentrated for you i.e. youâre heavily invested in individual stocks and not having enough capital invested in funds. So, if this is the case, consider trimming down your individual holdings and start building your fund exposure.
But let’s not forget that thereâs also the risk of not taking on enough risk! A friend of mine has been investing for more than 10 years. And do you what her biggest regret was? That she didnât take on more risk. She told me she had had too much of her money stashed away in in bonds (safe areas) and not enough in stocks (risky areas) and realised her pension is not growing at the pace she’d have liked. The younger you are, the more youâll be able to take on more risk since youâll have decades for the stuff to recover when markets take a tumble. As they did in ’08 and recently in March 2020. Not so long ago!
So, know how much risk you can tolerate and what youâre hoping to get out of your investment journey as well as how long you think the ride will be. This should help you figure out a strategy that works best for you and aligns with your specific goal(s). And, it goes without saying: donât invest more than you can afford to lose. You must be comfortable with the amount risk you have (or haven’t) taken on.
#3 Control your emotions
This oneâs a biggy. We all want to buy low and sell high. But the trouble is that we often let those pesky emotions get the better of us.
Take impatience. The most dangerous of all. It causes us to buy/sell on ânoiseâ because weâre not seeing enough returns quickly enough but the trick to increasing our returns more often comes from doing less than doing more!
But this goes against everything weâre taught. We think the more we do, the better we’ll become. But the less trading you do (aka forever buying/selling) and the less you mess around (with your portfolio, that is), the better your returns will be. Since timing the market is near to impossible, focus on time in the market instead. Time is your greatest asset, so use it well!
And if there’s one trait to focus on this year it should be patience. It’s ever so tricky since everything seems to be so short-term these days. And getting more so by the minute. But if youâre a long-term investor, why waste your time looking at daily share prices?! They really donât matter so just forget about it and let your money work for you while you do your thing. One less thing for you to worry about.
#4 Slow down
Investing is a marathon; not a sprint. I guarantee that most of us are investing for long-term goals like buying a house or for our retirement Read here why you need to think about retirement now, not in 20 yearsâ time! So if your goals are long-term, why on earth are you thinking short-term?
And, you know what they say: ‘slow and steady wins the race’. While it’s not fun and flashy to get rich slowly, it’ll be far more long-lasting. And that’s we want. We don’t want easy come easy go. We want the exact opposite.
While we canât change the past, we can certainly change our present – and our future! So whether youâve made some investment mistakes along the way (I know I certainly have!), or are just getting started, remember that itâs not where you start. But where you land up.
So do your best to stay positive and never invest on emotions. Or following the crowd. Since this will just land you in trouble. Keep your long-term vision at the front of your mind and go for it. The world really is your oyster.
On that note, cheers to a happy and healthy 2022 dear readers!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.
Knead Your Dough 