There was a time when saving and investing for the future was considered a relatively uncomplicated affair that felt many steps removed from the intricacies of finance and global economics. Progress in recent decades – from the sophistication of everyday technology to the ready availability of round-the-clock services – has simplified many parts of our lives. But it has brought more complexity too, particularly in matters of personal finance.
While many things have changed, there are a number of constant principles on which investors should base their strategy to help fulfil their financial aspirations. The key rules that investors should follow in their quest for wealth are simply:
1. Make sure you have sufficient money for your short-term needs
All over the developed world, savers are enduring the lowest returns on cash for centuries; but many remain wary of stock markets, despite their recovery from 2009 lows. In such an interest rate environment, those who wish to achieve meaningful returns will need to reassess their savings on deposit. However, cash does still play a vital role in an investment strategy, and enough should be kept on deposit. As Chris Ralph, Chief Investment Officer of St. James’s Place, says: “If you maintain adequate liquidity, you should avoid the need to sell long-term investments at a bad time. As a guide, you should have enough to be able to sleep at night, and cover both expected needs and unforeseen emergencies.”
2. Guard against inflation
One persistent obstacle that an individual will need to overcome on the road to wealth creation is inflation. Even modest levels of inflation can erode cash in a low interest rate environment. While you should hold money on deposit for short-term needs, there is significant risk in trying to play safe by putting all your money into cash-like investments. When investing for the long term, you should keep an eye on inflation.
3. Invest for the longer term
“Investors cannot consistently and successfully time the markets, but those who hold assets for extended periods can reap the cumulative benefit of time’s smoothing effect on market fluctuations and unforeseen events,” says Ralph. No one knows what will happen to share prices in the short term, but those who invest over a longer period – say five years or more – are likely to be better off than they are today.
4. Diversify your investments
Shares, bonds and commercial property are examples of assets that can provide growth. Investing in funds rather than individual investments also ensures that money is more widely spread. And by investing in a selection of funds that diversify across different shares, sectors and regions, as well as asset classes, investors will be better placed to withstand shifts in economic and financial conditions and achieve above-inflation returns over the long term.
5. Find the very best managers
Different managers have different styles and assets; but many invest in the same way, so variety is no guarantee of diversity. There are a large number of fund managers to select from; some are excellent, some are very good, and some are not. “It is critical to have an investment approach that gives the best chance for your money to be with good managers,” advises Ralph. “Understanding how your adviser researches, selects and monitors the fund managers should be high on your list of priorities.”
There are no paths for investors that are risk-free and there probably never were. Making an informed and confident choice is not an easy task. The key to building long-term wealth is a realistic assessment of needs and goals that reflects a level of risk that feels comfortable. Individuals are often reticent about reviewing their approach to wealth creation; but advice is the key for a planned, long-term investment strategy and for peace of mind.
It’s always recommended you seek advice when it comes to financial planning. Should you wish to discuss any of the above information in more detail or request a copy of The Investor Magazine, please do not hesitate to contact St. James’s Place at email@example.com.
More financial tips for expats.