Our Top 5 Investment Tips for Better Financial Planning
Everyone is capable of reaching their financial goals—you just need a plan to get there. However, a shocking number of people either don’t have a plan at all or aren’t confident in their financial planning.
In their 2021 Financial Wellbeing Survey, the UK’s Money and Pensions Service found that one in three UK adults are worried about their financial situation. A whopping one in two (technically 45%) don’t feel confident in their day-to-day money management.
Fortunately, proper investment planning offers a simple solution that can restore confidence and put you on the path toward better financial health. In this post, we’ll break down our top five investment tips that everyone should know.
#1: Make a plan and stick to it
We all have a lot of emotion tied to our finances. But when it comes to investing, emotion is best left out of the picture. Our emotions can easily get the better of us, impacting how we make investment decisions. Knee-jerk reactions to market fluctuations can lead to buying high and selling low, making it tricky to stay on track and achieve long-term financial goals.
Unless you’re Warren Buffet, resist the urge to try to time the market. Missing just a small handful of the best market days can have a massive impact on your success, meaning your money is best left in a long-term investment plan than out, even during market downturns.
Performance of MSCI World (Bloomberg)
Investing is a long-term strategy. Make wise decisions and plan based on your goals, then stick to that plan. Successful investors keep calm heads and don’t overreact to temporary market conditions. At Spring, we use leading-edge technology and AI-powered predictive analytics to increase the efficiency of decision-making and take the emotion out of investing.
#2: Adjust your liquidity
Liquidity is the ability to turn an asset into cash. Some assets “liquify” more readily than others (mutual funds, for example) and are known as liquid assets. Other assets, such as property, are considered illiquid because they take time to cash out and involve more complexity.
Consider the amount of liquid vs illiquid assets in your portfolio and make sure the balance is right for you. Will you need quick access to your funds, or are you happy to have your money safely invested but effectively inaccessible for a long period?
Of course, we all need some liquid assets for day-to-day expenses or unexpected bills. If your only asset were a house, it would be hard to sell quickly for a good price to cover a car repair or even a grocery bill. But at the same time, cash isn’t always king. Don’t keep so much in cash that you undermine your long-term investment objectives.
#3: Diversify your investments
Diversification is the financial term for spreading your eggs across multiple baskets. We diversify our investments—or spread them across several different types of assets—so our entire financial future isn’t tied to the success of just one.
The basic idea is this: if you have many different investments and the value of one falls, your other investments can help stabilise your overall returns.
In the past few years alone, the market has seen its fair share of surprises: a global pandemic, geopolitical conflict, natural disasters, and surging inflation. Investors with a diversified portfolio in terms of uncorrelated assets, industry sectors, and geographic locations have produced an overall annualised return of 4.6% over the past 10 years, despite these and other surprises.
#4: Leverage the power of compounding Interest
Compounding interest has been called the 8th wonder of the world, and for good reason. Reinvesting your dividend payments allows your money to continue to grow on itself, making an exponential difference over time compared to price appreciation alone.
To break it down a bit, compound interest refers to the interest earned on reinvested interest. For example, if you put £1,000 into an interest-earning savings account and the bank pays you 2% per year, you’ve earned £20 by the year’s end. That’s not much on its own—but that’s where compound interest comes in. Compound interest is the interest you earn on that £20. Even if you don’t put more money into the bank, you’ll continue to earn more and more each year as your money grows on itself.
Compounding is the closest thing to financial magic, accelerating your money’s growth as long as you don’t withdraw your interest. By simply leaving it alone, it will continue to grow at exponential rates.
At Spring, we use the magic of compounding to turbocharge your returns. The more you invest up front, and the more time your money can grow, the more you’ll earn.
#5: Expect volatility
Market volatility is normal, as the past five years have reminded all of us, so don’t let it derail you. Though rough patches are inevitable, markets distinctly trend up and to the right. For example, the S&P 500 index has shown 80% of the last three decades ending in positive overall returns.
Volatility is a measure of how much an investment bounces around in price. More volatile investments change more often and more dramatically, while less volatile investments have a smoother trajectory and are slower to change.
In general:
Higher volatility → more risk → higher potential returns
Lower volatility → less risk → lower potential returns
Volatility is one way to determine if an investment is right for you. For example, if you’re investing money that you’ve saved up for a down payment on a home, and you expect to purchase that home within the next year, you probably want to invest that money in an asset with very low volatility so you can grow your money safely over the short term. That way, you can be sure the money will be there when you need it.
On the other hand, if you’re investing over a longer timeline, you can afford to take more risk and invest in more volatile assets, because volatility tends not to derail investments in the long run.
At Spring, we’ve created a handful of portfolios with varying degrees of volatility. If you aren’t confident selecting the assets that are right for you, don’t worry—our speedy online assessment will do it for you!
Need help creating an investment plan that’s right for your financial future? Get in touch with our team today at info@spring-im.com