Elements of a Healthy Retirement Plan
- 1 | Strength -
A Strong Core
The key to building stability and keeping control
As with physical exercise, building a successful investment starts with the core. A sound, solid base that can help you weather storms, prevent serious injury - and which you can then build on as opportunities come along.
So here are our 4 tips for getting it right.
A good place to start your investment journey is in a single fund that is widely diversified. One that targets companies across a range of markets. And perhaps even brings in different assets as well. Property, gilts and corporate bonds, for example.
Spreading your money spreads your risk. Because, whilst all markets and investments assets go up and down in value, they don't all go up and down at the same time. Nor by the same amount. Having a bit of everything means when something does go wrong, you will also own something that has gone right. Or has gone wrong but by a lesser amount.
Keeping your money simple like this will also help you see what is actually affecting markets. You'll start to see the overreactions - both up and down. You may even begin to spot the differences between what the pundits say is going to happen and what actually then happens next.
You might be surprised how many times they get those predictions...err...wrong.
2. Buy low, sell high
Ah, the holy grail of investing. Who does this consistently well? The evidence suggests no one. Not consistently. Even Warren Buffet said he doesn’t always get it right.
The problem with market investment is it's so easy to follow the crowd. When the whole world is telling you how amazing something is, the massive wave of positivity and confidence is difficult to ignore. And when you see the price go up again, not being a part of it leads to some serious feelings of missing out.
The problem is, that's the point when you should be selling, not buying.
Similarly, when, for example, the BBC puts a stock market fall at the head of its news bulletin, and tells you how dire the world is. How can you not feel scared? And when the market then goes down again? It would be difficult not to just sell out and cut your losses.
Yet, that's the point at which you should be buying.
Which is all very well. But investment biases such as this are very difficult to ignore. It's why very few humans - even the so called 'stars' - can get this right. For us mere mortals, though, there is a MUCH easier way to invest that ignores ALL of these issues...
3. Make it a Habit
The human instinct to go with the crowd is a known investment issue. One that sadly does not help you build a solid and stable portfolio. There is, however, one way to step round the issue completely - and behave as if it were not even there.
Investing on a monthly basis, by direct debit, the very next day after payday, is THE best investment habit you can have. It happens without you doing anything, it takes money before you even see it (never mind spend it) - and it completely side steps any issues related to 'following the crowd'.
By investing little and often, you cannot fail to buy your investments at anything BUT a range of different prices. When markets are rising, you'll see your money grow. And when markets are falling, you'll be buying those amazing assets on the cheap.
The best bit? You don't even have to think about it. Set it up. Leave it. And forget it even exists. Get on with living your life. Check in again only after a couple of years. Or when your circumstances change. Or because you want to increase the amount of that direct debit.
4. Don’t push it
Just as you plan how to build up your investment up, so you should also plan how to exit. And, therefore, as your target date (say, retirement) gets closer, it is sensible to start consolidating those gains.
The same as you do with monthly savings on the way in, consider drip feeding your money out again. So that you benefit from yet another range of different prices. And don't end up selling everything on the worst day.
Take a view of things perhaps 5 years ahead of your target date. Consider what you'll need on the target date and what could stay invested for longer. Then begin switching your money out of the higher risk investments and move it slowly into something more stable. So that, on that target date, the amount you need straight away is sitting in cash, waiting for you. And the rest is lined up suitably, to help fund the rest of your life.
This is so powerful, some pension providers now offer funds that actually do all this for you. In fact, if you have one of the latest, workplace pension plans, you may even already invest in one. Because, after all that hard work you've put into building that money up, the last thing you need is to see it wiped out by a last minute down turn.