by Martyn Paterson
Chartered Financial Planner
With the current state of volatility, it’s very easy, and very tempting, to focus on the markets, the economy, manager ratings or the performance of individual funds. This may lead you to overlook the basic principles to give you the best chance of success.
These principles rest on a simple idea: Focus on what you can control.
Goals – You should create clear, appropriate and realistic investment goals. The investment process begins by setting measurable and attainable investment goals and developing plans for reaching those goals. The old adage, fail to plan, plan to fail could never be more true.
Balance – Develop a suitable asset allocation using broadly diversified funds. A successful investment strategy starts with an asset allocation suitable for its objective. Investors should establish an asset allocation using reasonable expectations for risk and potential returns. The use of diversified investments helps to limit exposure to unnecessary risks and diversifying globally enhances this.
Cost – Minimise costs. You can’t control the markets, but you can control how much you pay to invest. Every pound that you pay in costs and charges comes directly out of your potential return. Indeed, research suggests that lower-cost investments have tended to outperform higher-cost alternatives.
Discipline – Maintain perspective and long-term discipline. Investing evokes emotion that can disrupt the plans of even the most sophisticated investors. Some make rash decisions based on market volatility. But you can counter emotions with discipline and a long-term perspective.
In summary, a successful plan may include objectives, timescale, risk profile, investment mix and monitoring. By sticking to a predetermined plan this also helps to guard against the tendency to chase returns by moving into and out of the best and worst-performing sectors based upon recent past performance. Many investors fall prey to this trap. But, by rebalancing to your original allocation rather than chasing market performance, you can help to ensure that your portfolio remains aligned with your goals and your appetite for risk.