Nutmeg is a discretionary investment management service based in the UK. Shaun Port, the Chief Investment Officer at Nutmeg, has put his 20 years of experience to use and highlighted what he believes are the principles to becoming a better investor.
Principle 1: Remember the trade-off between risk and return
As with most things in life, for rewards there must be risk and it is vital to take time to assess the level of risk you are comfortable with, before you begin investing. Assets that yield the highest potential return also come with the highest potential risk. If you are risk adverse you might want to favour assets that have a lower level of risk, but at the cost of lower potential returns.
Principle 2: Be diversified
As the saying goes, don’t put all your eggs in one basket. It is important to diversify your investments; this can be through asset classes, geography or sector. By investing across a number of markets and industries this will reduce the risk and, if done correctly, will not reduce the return potential.
Principle 3: Invest for the Long Haul
It is common for new investors to jump in and out of the market due to fear. Watching the value of your stock drop can be a scary thing, particularly in a volatile market like we are currently seeing, but don’t panic, as addressed in a recent blog post: Stock Market Volatility? Now IS NOT the Time to Panic.
Assessing your comfortable level of risk before investing will help reduce this feeling of fear and allow you to relax and let your investment work. Data collected from Microband shows the benefit of continuous investment over a number of years, compared with dipping in and out over the same period, those who dipped in and out missed the most profitable days over the time period, which significantly impacted their overall return.
Principle 4: Rebalance and Re-invest
By diversifying your investment across a number of markets you have reduced your risk but it is also important to remain in control of the funds. Rebalancing helps reduce risk again and re-investing is important to achieve the maximum return.
Principle 5: Keep costs low
A passive fund is bought and left to its own devices, in comparison to an active fund which is managed and requires constant attention to ensure it is working and beating the market. An active fund pays a higher charge percentage than a passive fund and so the cost to the investor is greater, the more work that goes into managing a fund, the greater cost that will be incurred. To keep costs low think about a passive fund or managing your own investment.