MAKING your money work hard by investing in the stock market is a smart move for long-term savings. Here are six tricks of the trade that will help maximise your returns:
1. Invest monthly
You might be wondering when the best time to invest might be. Is it best to wait until the market drops to buy cheaper stocks? The recent US elections are an example of how markets can drop and re-bound very quickly. Timing the market is hard even for professionals. A much-favoured trick is to drip-feed money into the market, which removes the need to get the timing right. By saving a monthly amount into an investment portfolio, you can smooth out the highs and lows in share prices because when they go up, the value of stocks rise, and when they go down your next contribution buys more. This is known as pound-cost averaging.
2. Reinvest dividends
By reinvesting dividends over time, the growth of your savings pot should enjoy a decent boost. In fact, reinvested income is the biggest overall contributor to total returns over time thanks to compound interest. This is the term used for earning interest on interest — or more specifically in investment terms, generating income from previous income.
Piling all your money into one asset class or one geographical area is a risky game. Instead spread investments in everything from equities to bonds and across different regions. But don’t make the mistake of buying too many funds as you’re likely to have lots of overlap, which will defeat the point of buying more to spread the risk. Experts recommend holding between 15 and 30 funds with exposure to different sectors.
4. Do your homework
When making your first investment, following the trend isn’t necessarily the best strategy. The top-performing assets one year could continue to do well or plummet. Your best bet is to understand the fund manager’s investment approach and how that manager is positioned based on their outlook for the future.
5. Watch out for charges
As an investor you will pay a fee for the running of your investment, as well as to the company — or platform — responsible for holding it. Investment charges differ between every single fund and the same goes for platforms. There’s no harm in paying a large fee for the management if it’s achieving huge returns. So just make sure you’re getting value for money. There’s no one-size-fits-all when it comes to platforms. Do a comparison to make sure you’re not paying over the odds.
6. Don’t forget to review your money
Review investments every 6 months or so to ensure they are performing in line with your expectations. If they’re not, try and understand why and then look to make changes if you need to.