5 investing lessons

By Morningstar |  04-03-19 | 
 

Emma Wall lists down the dominant lessons she has learnt over the years as a financial journalist. Mark Preskett from Morningstar Investment Management comments on her observations.

#1

There are two ways timing has to work to make it benefit the investor. The first is trying to work out when the market low is so that you can pile in. The second is figuring out the market high so you can sell. It's just impossible to time the market and even professionals get it wrong.

Preskett: Making short-term predictions on markets is extremely difficult to do and frankly, some would say impossible. We've done a lot of work and countless studies have been published on how to generate the best returns for investors.

When we look at the data on global equities over, say, the past three decades, an investor would have received around 6.8% per annum over that 30-year period. This is a very decent return. But, should you miss the 25 best days, your return goes down to 3% per annum. Should you miss the 50 best days, it drops to 0.7% per annum, which is lower than cash and inflation over that period. And often those best days come in the darkest moments of the market. 

#2

If it's almost impossible to time the market, then logically you should be in it to win it. If you don't have the time, the inclination or the skillset to work out when the best time to invest is, then drip feeding is the best option.

Preskett: Absolutely. Pound (or dollar or rupee) cost averaging is when you have a lump sum to invest, but rather than investing it on day one, you invest it in stages over a period of time. And clearly, in falling markets that does benefit you as an investor because your average price is lower.

If the market is rising, then perhaps you'd have been better off investing it on day one, but that depends on your risk, valuations of the market today, your attitude towards risk, and your willingness to take risk.

Our advice is to save regularly, dripping into the market. That's a slightly different concept in trying to set up a direct debit, set up a standing order. It's a flexible, affordable way of saving and over the long term, you will build up a tidy sum.

It's a way of investing through inertia. It's an easy way. There is flexibility. You can turn it off and on. But there's that peace of mind that every month some money is going into the market irrespective of what's happened over the last few weeks. 

#3

Income investing is not just for income investors. You shouldn't just think of an income-paying stock or an income-paying fund if you need an income right then. Because reinvesting those dividends, investing that yield is the surefire way to hit your growth goals as well as your income goals.

Preskett: Yes. Income is a crucial concept in all investments. It actually delivers the majority of your return from a bond (for a fixed income investor) and decent chunk of an equity return comes from the dividends. That rolling up those dividends you are benefiting from compound interest.

Reinvesting your dividends, those dividends accrue, dividends in turn and so on and so on and your pot can grow pretty exponentially. Einstein famously called it the eighth wonder in the world and I do still like that quote. It is a way over the ultra-long periods of two or three decades, your returns can be significant.

#4

Ignore sensationalist headlines, especially at the moment that could put you off investing forever.

Preskett: Investors need to remember the media is there to generate page clicks and views. That is their job and they tend to exaggerate to create interest. Investment journalism is no different than any other journalism in terms of current affairs and politics.

Look past the scary headlines and focus on fundamentals - valuations, the price, dividends, structural changes in industries. At Morningstar, during such periods we actually seek out contrarian ideas. We look at things like fund flows as a good indication of an area that's unloved. And what we found is, some of our best returns over the last few years have come from areas that are seemingly contrarian, such as Russian equities in 2016, healthcare stocks in the U.K. last year.

#5

Take advantage of “free money” - tax-efficient savings accounts, and workplace accounts where you get not just the tax back but also a contribution from your employer. Ensuring that your tax wrapper is working extra hard for you on top of the, hopefully, informed decisions you've made for your portfolio, can really make the difference to returns.

Preskett: Tax efficiency is key. Every year, my wife and I is look at our tax wrappers, our ISAs, and at what we are going to save; the tax allowance has grown quite considerably over the last 20 years. I remember back there was few thousand pounds, now it's up to £20,000. I have SIPP that I actively save into as well every year which is shielded from the taxman. So, these are ways of growing your money and what we talked about before, the pound cost averaging, using compound interest, but doing it inside a tax-efficient is key.

This post initially appeared on Morningstar.co.uk

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