How to succeed at investing

With most things in life, laying down good foundations creates a solid outcome. Investing is no different in that respect to building a house. The British military call this the 7 Ps: Proper Planning and Preparation Prevents Piss Poor Performance.

So why is it that clients often look at me oddly when I ask them, ‘Why are you investing?’

It’s not a trick question! I’m simply looking for clarity on what’s important to them, while they just want to ‘skip to the good bit’ like Rizzle Kicks did in 2013.

We’re physical beings run by our emotions. When you have a good day, and receive a compliment, you see things more brightly and happier than you may otherwise have. But have an argument with your significant other, lose some money or have an accident and this tends to change your mood and how you act until you change your physical state, which may involve a workout, alcohol, or a good sleep.

Our values in life are what’s important to us. When our values are being met, life seems a little more effortless and we live in the flow; break your values consistently and you’ll feel unfulfilled, demotivated and flat.

That’s why I ask my clients, ‘What’s important to you about money?’ Because if your values about money are met, your investment experience will be more enjoyable.

You need to have a plan before you decide to dive into an investment and that’s what working with a true financial planner will do for you.

You can think of it in medical terms: if you have a serious ailment, your doctor puts together a treatment plan to help you achieve the results you want. Medication is just a single part of the treatment – admittedly an important part, but not the only part.

When investing, money is only one important part of it too. The bigger picture matters.

Investing mechanics

You have a few options when investing:

  1. DIY and go solo. When you’re investing for fun, or with small amounts, this often has advantages. You wouldn’t care too much if you lost your investment and if you want for example to have a punt on a cryptocurrency, you don’t want someone talking you out of it. But success or failure in investing starts and ends between the ears, and doing it alone can be a difficult task.
  2. Use a stockbroker or investment adviser. This would be like taking medical advice from a pharmacist, they know their stuff, but their area of specialism is the medication, not the wider treatment you receive. You need someone with a broader understanding of what the overall outcomes should be.
  3. Work with a Certified Financial Planner. This is someone who can sit alongside you at the table and put you at the centre of the universe of options – that may well be investing, but it may not be; not everything is solved by buying equities.

The most important thing you can do, like Simon Sinek said, is to start with your Why. Why are you investing? From there, your investment strategy will form just one part of your overall lifestyle financial plan along with your tax planning, catastrophe planning and succession planning.

Strategy

Let’s say you’ve built your financial plan. What should your investment strategy look like?

Your financial plan will highlight what you want to achieve in life, how much you need to get there, and what investment return is required to achieve this.

It is much better to look at your investment strategy armed with this information, than to embark on the journey blindly.

If you don’t need to achieve equity-type returns, if instead you can do all the things you want to with AAA-grade bonds, should you take the risk? It’s better to address this question before you start.

Armed with this information, like the vitals a doctor would take when you visit the hospital, you can proceed to the investment suite.

Expectations

Not all investments are created equal. It’s best you know this upfront and, sorry to be blunt, but just because you sold your business for £30m, it doesn’t make you an investment expert. The market will take that money from you in a heartbeat if you don’t manage your emotions and your strategy, but on the flip side it will reward you handsomely over time if you stick to your rules.

As humans we are generally impatient. Society has taught us that we can expect things now. I appreciate that’s not true for everyone, and generally older generations are more patient than younger generations, and I think that’s because of what they experienced in life.

When my parents grew up, if they couldn’t afford something, they saved for it; credit to buy items was not freely available. Today sometimes we’re encouraged to take the finance deal because the retailer makes more money from the finance than the goods, but this behaviour has not taught us well for our investment journey.

Time

When you invest, your best friend is time. You need to plant your seeds and allow your investment to grow. Just like you wouldn’t dig up the seeds of your oak tree every few months to check what’s happening, you would leave them alone to germinate and grow, investing is no different.

Compound growth is exponential, which means over time it multiplies to get larger, but it’s slow to start. Your investment capital will start off slowly, ticking along, but if you have the patience to allow it to grow, you’ll be rewarded with accelerated growth.

Look at it this way: often people have a good ‘investment experience’ over time with their home. But that’s not because property has performed better than equities – actually, it hasn’t. It’s because you don’t sell and buy houses every day, you tend to purchase and stay there, and your house price is not valued daily on your computer screen. You know what you paid for it, you have an idea of the value today, and you’ll accept what you sell it for. It’s all one step removed from you.

Whatever you invest in, it’s essential to have your psychology aligned with what it is you are looking to achieve, to create a plan which aligns with your values, and to take action, and then review your results to keep you on plan so that you achieve you goals.

In future articles in this series, I will look at how to put the right mix of assets together, and what accounts to use to achieve the outcome you want.

Warren Shute MSc. CFP is a multi-award-winning Certified Financial Planner and Investment Adviser at Lexington Wealth Management. He is the author of the Amazon bestseller The Money Plan and host of The Money Planner podcast. Among many regular media contributions, he writes the weekly Sunday Mirror column Money Talk and has appeared on BBC and ITV.