Investing tips

Seven golden rules of investing
By Nick Louth, MSN Money special correspondent
Last updated December 22 2004

These seven brief rules are really all you need to know to get a good leg up the investing ladder. Most of them work pretty well for ordinary savings too.

1. Start early, stay the course

Start investing young. If you do no more than put aside the cost of a bottle of Becks a day from the age of 18, and don’t raid it, you have already laid the foundations of a secure retirement.

Based on average stock market returns you will have £265,000 by the age of 65. If you wait until you’re 50 before starting, building the same pension pot will cost you the equivalent of a bottle of single malt scotch a day.

Click here for the full details of how youth helps investors

2. Low costs: the no-risk way to better returns

You want all your investment money to go to work for you, not the person who sold you your investment. So, for example, even though 2.5% a year in charges may not sound much, trimming that much off your investment pot year after year will have soaked up a two thirds of your total contributions after 25 years on a fund investment returning 7% a year.

For example, if you contributed £100 per month, that works out as £30,000 paid in over 25 years. At an average 7%, the fund would be worth £69,812 gross over the period, but after annual charges of 2.5% it would be worth a mere £50,027.

The same principle applies to trading commissions and account fees: keep them low and you get extra returns for nothing.

3. Don’t neglect the humble dividend

Reinvested dividends are the cornerstone of long-term stock market returns. They are the only part of share market returns which are never negative.

By contrast, share price returns are only about trying to outwit the market’s pricing mechanism. On average, by definition, we lose as often as we win. But dividends really add up, and their rate of increase is as important as their initial size.

See also ‘Get more from your dividends’

4. Don’t let small mistakes turn into big ones

This is a very important rule, especially for stock market investors.

The moment that an investment starts to go wrong, you should get out while the amount at stake is small. Profit warnings or even small unexplained falls in the prices of shares can soon do damage to your wealth.

Most importantly, never, never, add more money to a losing investment in an attempt to lower your break-even level.

See my article “How to deal with profit warnings”

See also “How to cut losses”

5. Never put all your eggs in one basket

This is essential advice, whatever kind of investments you have. Unexpected events can take place which hit particular shares, house prices, bond markets certain industries or countries, yet so long as we haven’t got everything riding on one type of investment, the outcome should be manageable.

But, for example, homeowners who have extensive buy-to-let market commitments, employees who have shares or options only in their own employer, or bank traders who invest their own savings in the field they trade, are running extra risks. This is especially so if they don’t have much in the way of cash savings should their bets fail.

Click here for more details on recognising and spreading your risk

6. If you don’t understand it, steer clear

This is true both of the complex investment products such as precipice bonds which were mis-sold, as much as it is of investors in technology shares which sounded impressive, but which rarely fulfilled their potential.

If you don’t understand what you have invested in, you will never know when to get out when the warning signs of failure are there for others to see.

7 Don’t fall for quick money promises

There is no risk-free way to become rich, and don’t believe anyone who says otherwise. The slow way to wealth, investing gradually and carefully in a wide variety of shares or in a low-cost tracker fund, is safe for those with a 10-20 year view.

If you fall for a scam or fraud, the chances are that your savings are going to go backwards. Opportunities that look too good to be true usually are, and the more impatient we are the more the chance there is of falling for them.

See ‘get started: why shares?’