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Three investment principles for an uncertain outlook

Jonathan Wright

Jonathan Wright - Fidelity Personal Investing

Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.

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This week I had the privilege of speaking at an alumni event hosted by Coventry University’s Investment Society.

As I took the trip down memory lane, in this case 25 years since graduating from the university, inevitably a lot looked very different, but there was also a lot of familiarity.

I was asked to share my experiences from the world of work. Taking a step back to really think about that proved quite an insightful exercise as you realise how things have changed over the years.

For example, looking specifically at the investment industry, advancements in technology means you can now browse, trade or check the value of an investment online. Gone are the days of leafing through a brochure, then posting off a cheque with an application form.

With investment supermarkets you can now hold a whole range of funds or assets from different providers all in the one account and switch between funds effortlessly. Much easier than the old days of multiple accounts, with multiple providers and multiple passwords.

Yet within this time of great change, where stock markets have gone both up and down, there have been certain principles and strategies that have stood the test of time and have not changed.

This week as the spread of coronavirus dominates the news headlines, causing stock markets to fall, I’m reminded again of some of the investment principles that were true during similar periods of volatility in the past, when the outlook looked just as uncertain.

Here are my top three:

1 - Be diversified

Being diversified, or not “putting all your eggs in one basket”, is crucial for all investors. Taking too much risk and investing in one asset you really believe in can have dire consequences if you get it wrong as not all assets perform in the same way at the same time, especially during periods of volatility.

Similarly, being too cautious and not taking enough risk could mean over time your investments have not grown enough to beat the negative effects of inflation.

With stock market investing there are no guarantees, so spreading your investments over a range of different assets, like shares, bonds, property, even precious metals like gold, over a number of different regions and sectors, is the best way to be diversified. That way, the investments doing well will compensate for the ones doing not so well. The easiest way to get this diversification is through a fund. For fund ideas, a good place to start is Fidelity’s Select 50 list of recommended funds or the Fidelity Select 50 Balanced Fund which, as its name suggests, provides a ready-made balance of different investments in the one fund.

2 - Don’t try and time the market

When it comes to investing, it is time in the market that’s important, rather than trying to time the market. When the stock markets get volatile it’s easy to think you can sell to prevent further losses and buy back before the markets go up again. However, in practice, this is extremely difficult. No one rings a bell at the top or the bottom of the market. Trying to time the market means you have to time two decisions perfectly - when to sell and when to re-buy again.

Just as market falls come unexpectedly, so do the sudden rises. It, therefore, makes sense just to stay invested to ride out the volatility. The most important lesson with investing is to make sure you can give that investment time to grow. If you know you’ll need the money in the short-term and can’t invest it for 3-5 years, it would be foolish to take on too much risk. It could fall in value just before you need it.

Staying invested also helps you benefit from the power of compounding, which is best described as earning interest on interest. Over time it’s amazing how this adds up.

3 - Invest in stages

Making regular monthly contributions to your investments as part of a savings plan can help them grow into a sizable sum over the long-term, even if you’re only investing a small amount.

Setting up a direct debit also removes the temptation to try and time the market as your investment is made automatically for you on the same day each month. By investing on a regular basis if the stock market is rising and falling, you’ve paid more of an average price for the shares you’ve bought over that period.

Similarly, when it comes to selling your investment, if you don’t need all your money at once, you may want to consider selling in stages too to get more of an average sell price.

More on More on Coronavirus and volatility

Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. Select 50 is not a personal recommendation to buy funds. Equally, if a fund you own is not on the Select 50, we're not recommending you sell it. You must ensure that any fund you choose to invest in is suitable for your own personal circumstances. Overseas investments will be affected by movements in currency exchange rates. Investments in emerging markets can be more volatile than other more developed markets. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to an authorised financial adviser.

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