5 investment themes that stand the test of time
After another very strong year for markets in 2021, with the S&P500 index up over 27% by the middle of December, the attention of investors has rightly turned to what’s likely to happen this year. While most commentators are more cautious about the prospects for 2022, none of them (or us for that matter) have a crystal ball! For this reason, prudent investors stick to the principles and themes that have served them well through different market conditions. We’d like to suggest a few investment themes that have stood the test of time, for you to consider.
Follow a diversified Asset Allocation Strategy
Successful investors don’t spend their time trying to pick winners. They know that for every winner (and there are always winners), there tends to be many more people who lose when it comes to taking risky bets on individual assets.
Instead wise investors spend their time developing an asset allocation that supports their timeframes, objectives and attitude to risk. They know that by spreading their risk across different types of assets (stocks, bonds, property, cash etc.) and different markets / geographies / sectors, they are likely to achieve more consistent returns over the medium to long term. And this is usually in line with their investment objectives.
Time in the market is key
It’s a well-worn phrase in the investment community that “time in the market” will always trump market timing. Thinking they know where markets are going has turned out to be a really expensive mistake for investors throughout the ages. It is just pot-luck as to whether you get your timing right, and inevitably there are many more people who get it wrong than then the lucky few who hit on fortunate timing.
A recent example of this is when the Covid pandemic hit in mid-February 2020. Markets quickly tanked, and lost more than 30% of their value in just over a month. Some investors thought this would continue and moved to cash. Of course we all know what happened then – these investors missed out on the immediate and sharp recovery, with the S&P500 increasing by over 60% over the remainder of 2020… and another 27% in 2021. No-one could see this coming, and this is why time in the market is so important. Yes, it can be hard to stay invested when markets are falling. But by taking a long-term approach to investing, shutting out the short-term noise and staying invested, you are more likely to achieve your investment objectives.
Carefully consider some investment strategies to increase wealth
We also recognise that investing is not simply a case of putting a portfolio in place and then just forgetting about it for many years, because circumstances change. Your objectives might change, new monies may become available for investing and parts of your portfolio might perform better than others. For this reason, we place a lot of importance on our regular portfolio reviews. Then as needed, we deploy or suggest different strategies that are likely to support your long-term objectives. These might include the likes of,
- Rebalancing: This is where you buy or sell assets in your portfolio to maintain your desired asset allocation, as the prices of the different assets change at different rates.
- Euro cost averaging: This is where you may have new money to invest and are nervous of sudden falls in the market. We may encourage you to invest over a period of time on a regular, monthly basis as opposed to investing your new money in one single transaction. If prices are high, your monthly amount will purchase less shares of a well-performing asset, but if the price falls, your “new” money will buy more shares.
Pay yourself first
It’s very nice to watch an investment portfolio grow. However we usually advise that people keep saving as a means to grow wealth.
For people who typically find regular saving difficult, one of the mistakes we often see is that they place saving as the lowest priority item in their monthly budget. They pay their mortgage, their bills, they go shopping, they spend on luxury items and entertainment, they probably waste a few bob…and then they save whatever is left over! So effectively these people are paying themselves last.
One great saving habit is to pay yourself first every month, immediately after you are paid. Sure, if you’re running out of money at the end of the month, you’ll have to “dip in”. But you’re much less likely to waste money, if you have to dip into your savings to do so.
Adopt a non-emotional investment approach
Investment markets have no emotion, so look at them coldly and don’t allow emotion to cloud your judgement. Greed and fear are two of the greatest threats to a good investment strategy, and cause market timing mistakes. People get greedy as markets race ahead and they end up buying expensive assets. Or they see markets falling, and exit as they are at a very low point. As the investment guru Warren Buffett famously said,
“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.”