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Five Steps to Achieving an Effective Investment Strategy

Guy Myles, 11 May 2016

Here are five key strategies for achieving an effective investment strategy, and maximising the returns on your money.

1. Understand your risks and weigh up the returns.

Risk and return are closely related. However chaotic markets might appear to be at any given time, they are likely to produce average returns over the longer term - and the best expected returns almost always carry the highest risks. So how do you use that to your advantage in your investment planning?

  • Recognise that your best performing investments are probably some of your riskiest. Analyse them closely and consider whether the size of your investment exposes you to a downside that's bigger than you're prepared - or able - to accept.
  • Accept that you're going to have to take risks to earn the best returns. If you've got a high risk appetite you could consider something quite racy like smaller companies that are poised to grow quickly or look for market trends that larger companies are in a position to benefit from.

2. Accept that the market is normally smarter than you are

According to the efficient market hypothesis, it's actually impossible to beat the market, because stock market efficiency causes existing share prices to always incorporate and reflect all relevant information. We don't believe this always applies but it is certainly true to say that beating the market is hard work and something very few managers can do. Of course, we've all heard stories that appear to contradict this - someone's investment strategy that netted them a fortune in a very short space of time - but in reality these do tend to be very rare and based on luck. (Or even based on insider dealing!)

If you're looking for short-term gambling-style wins, you'd be just as well served by visiting your local casino. It's far better to set your sights on more reasonable targets, and choose a benchmark rate to track progress against, such as the capital markets' long-term rate of return.

3. Play the long game

Whatever your investment plans, the best way to guarantee returns is to take a long-term view. While quick wins, achieved from timing the market, are possible, they're difficult to sustain and hugely risky - recent trends are no guarantee of the future, so what if a rising market suddenly changes direction and falls? Long term investing helps to smooth out short term volatility and also allows you to take advantage of compound growth, whereby profits are made on profits.

4. Diversify your portfolio to hedge your risks

The best way of mitigating risk in your investment plans is through taking care in how you structure your portfolio. Diversification is known as the only free lunch in investing for a reason!:

  • Choose asset classes that, historically, have experienced different return patterns. So, for example, if you're investing in the technology sector, consider what other sectors did well when tech was last doing badly.
  • Look beyond your own domestic market. The world is full of opportunities and, depending on the industries that you're interested in, it's highly likely that some of the best potential investments may be based overseas.
  • Make sure you have a high number of individual investments in your portfolio to help mitigate company-specific risk.

5. Know when to ask for help

Above all, recognise that achieving the strongest returns with your investment strategy can be highly challenging and that it's really OK to ask for help.

Professional investment managers are experts in assessing the right investments, constructing diversified portfolios and managing them over time. They're paid to do the job full-time not just as a hobby. Financial advisers can help by ensuring that all the investments you hold are aligned with what you want to achieve - and the risk you're willing to take on. They'll also be able to help with tax advice.

Having an expert on hand to provide advice and support can be highly beneficial and if you can keep the costs low, you'll find that more of your hard earned investment returns make their way into your pocket.

Flying Colours provides exceptional financial advice and investments that don't cost the earth. Call us on 0333 241 9900 for more information, or book a time for us to call you back.


Categories: Investment Insights

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