Investors are constantly bombarded with reasons to buy, sell or alter their investments. This barrage of information may be helpful to short term traders, but for longer term investors resisting the temptation to make changes can often be the best strategy.
Staying invested means you don’t have to try and time peaks and troughs – which is notoriously difficult – and you avoid the charges involved in transactions. The flow of any income from the investments also remains intact.
Below I outline four common-sense strategies for investors who want to shut out the market noise and be ‘hands off’ long-term investors.
1. Allow compound interest to multiply returns
Compound interest (earning interest on interest on interest) can be powerful if you allow it time. The principle is simple: Buy assets that produce an income and keep reinvesting that income in more income-producing assets. Over the years it can mean your wealth grows substantially, especially if the income stream itself grows.
This approach can work for any income-producing asset, but our favourite is ‘equity income’ – dividend producing shares. Over time companies can grow their profits and increase pay outs to investors. Continually harvesting and reinvesting this income can lead to strong long term returns if you select the right stocks.
Rather than pick them yourself, buying an equity income fund with ‘accumulation’ units can do this for you – see our Foundation Fundlist for our preferred investments in this area.
2. Buy ‘inevitables’
Invest in good-quality businesses and time is on your side. Invest in a poor-quality one and it isn’t. Certain businesses have what renowned investor Warren Buffett describes as an ‘economic moat’ around them. For instance, offering a unique proposition, dominating market share through a superior product or unparalleled channels of distribution. In these circumstances it is hard for newcomers to penetrate the market, so the strong can get stronger.
These are often large, mature businesses that can seem boring, but they can also make great ‘buy and hold’ investments. Choose carefully, though, as businesses often need to innovate to avoid being usurped by a ‘disruptive’ company with new technology. If you would prefer not to select shares yourself, or would like to diversify, funds that follow this philosophy and invest in a range of shares include CF Lindsell Train UK Equity and Fundsmith Equity.
3. Let the manager take the strain
Most fund managers remain ‘fully invested’ in their respective areas of interest, say UK equities or corporate bonds – and building a diverse portfolio of such investments can provide excellent returns over the long term. However, some multi-manager or multi-asset funds that take a more active approach, meaning you can also leave market timing decisions to fund managers as well – though there is no guarantee they will get them right.
Charles Stanley Multi Asset Funds are one option in this regard. Designed to meet different, broad investment needs and risk profiles, each fund offers a diverse portfolio in a single investment, actively managed by Charles Stanley's highly-regarded investment team. This means you do not need to regularly monitor and change individual funds, shares or other assets in your portfolio – it's done for you.
4. Invest regularly
One way to counter market ups and downs and take some of the stress out of investing is to contribute money at regular intervals, say once a month, rather than a lump sum in one go. No one can precisely call the market tops and bottoms, so the advantage of dripping money into the market is that you don’t need to worry that you are putting all your money in at the peak.
In fact the strategy can often turn market volatility to your advantage and is a sensible way of investing in more risky areas. Through Charles Stanley Direct, for instance, you can invest regularly from cash into funds in an ISA or Investment Account from as little as £50 per month per fund, and from £100 per month into a SIPP.
This website is not personal advice based on your circumstances. No news or research item is a personal recommendation to deal. Investors should be aware that past performance is not a reliable indicator of future results and that the price of shares and other investments, and the income derived from them, may fall as well as rise and the amount realised may be less than the original sum invested. Investment decisions in collective investments should only be made after reading the Key Information Document ot Key Investor Information Document, Supplementary Information Document and/or Prospectus. If you are unsure of the suitability of your investment please seek professional advice.