To invest, you need to draw up a clear plan, do your own research, build in a margin of safety by always thinking about the valuation and, ultimately, be patient. By all means include some speculative picks if you wish, but ensure they are only a small part of your portfolio. Looking for an oil explorer whose shares double, treble and double again is exciting but such firms are very rare. There are a lot more which have a consistent record of paying out the dividends which really make the markets work for you, once they are reinvested.
If it sounds simple, it is. Inevitable market slumps can then be embraced as times to buy good stocks, funds or bonds cheaply, not a reason to panic and throw out bad picks at any price.
The trick is how to select the picks which best suit your investment goal, target returns, appetite for risk and time horizon. Our 10 golden rules summaries this entire guide and they should help everyone spot plum portfolio picks and also dodge likely duds.
It bears repetition that the financial markets are a get-rich-slow scheme not a fruit machine. If you lose your discipline you will lose money, heart – and then even more money.
1. Have a plan
Before you put any cash to work, you must know what you are investing for. This will condition your target return, time horizon and appetite for risk and therefore the asset classes best suited for your aims.
2. Never invest in something you do not understand
Peter Lynch of Fidelity was one of the most successful fund managers ever, and he said he never touched anything he could not describe on one sheet of paper with a crayon. You will be angry with yourself if you lose money on something and cannot explain why. Stick to what you know and always do your own research.
3. Do not put all of your eggs in one basket
A diversified portfolio of 12 to 15 stocks, bonds and funds should cover most eventualities and keep something trickling into your savings pot almost whatever the weather assuming they cover a range of different industries and geographies. This number is also practical in terms of dealing costs, news flow management and performance measurement.
4. Respect the market
Stunning rises and huge crashes show that markets are not efficient, but you must respect their views. When you buy or sell something you are saying the market is wrong, so you need to have a good reason why.
5. It is better to travel than arrive
Financial markets discount – or price in – future events. That is why a share price will sometimes fall on good news and rise on bad, as the valuation already factors in these events.
6. Go against the herd
Punters go skint backing favourites on the horses, and although it may work in the short-term, purely following hyped, momentum names can be dangerous. To get the best long-term returns you will eventually need to sell what everyone is talking about and buy what is being ignored – providing the valuation is right and growth, risk and quality checks are met.
7. Cash is king
Profit is a matter of opinion, cash flow is a matter of fact. Some unscrupulous managers will try and dress up their profits but they cannot fiddle cash. Accidents happen when companies look profitable but generate little cash so focus your research here when looking at individual stocks.
8. Dividend reinvestment is vital
Patient portfolio builders should focus on firms with a strong competitive advantage and a good reason why clients want to pay for their goods or services. This confers the pricing power that enables companies to generate cash and pay the dividends that really get your savings to tot up over time. There are many funds dedicated to such firms, too.
9. It's never different this time
According to fund management legend Sir John Templeton these are the most expensive words in investment. They lead the unwary to pay any price for a good story and forget about valuation with disastrous consequences, as shown by the technology bubble of 1998-2000 and mining boom of 2005-07. If something looks too good to be true it usually is.
10. Focus on value, not price
You would not enter a restaurant and buy a pizza regardless of whether it cost £5, £10, £20 or more. You would use your judgement to decide what is good value, and the same discipline must apply to financial investments. Several simple metrics, in the context of growth, risk and quality, will help you decide whether a valuation is cheap, expensive or about right.