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  • New Year’s resolutions to help make you a better investor

    Here are 7 investing resolutions to take into the New Year to help you become a better investor.

    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

    January can feel like a clean slate. It’s tempting to adopt the ‘new year, new me’ mantra. However, making small, reasonable adjustments to our habits is often more effective because it’s easier to maintain than a complete overhaul. The same is true when it comes to investing.

    Small tweaks to your investment attitude and portfolio can set you up to benefit down the road. With that in mind, we think these 7 resolutions should be on every investor’s mind as we start a new year.

    This article isn't personal advice. If you're not sure whether an investment is right for you, seek advice. Investments, and any income they produce will rise and fall in value, so you could get back less than you invest.

    1. Hold your nerve

    If the last two years have taught us anything about the market, it’s to ride out the storm. When the market plummeted in 2020 in response to the pandemic, it would have been tempting to jump ship. Despite the wild swings we saw in 2020, the FTSE 100 actually rose 78%* between 2010 and the start of 2021. During that period, the FTSE 100 finished the year higher than it started 7 out of 10 times.

    Total return

    Scroll across to see the full chart.

    Source: *Refinitiv 1/1/2021. Past performance is not a guide to the future.

    This shows the importance of investing for the long term. Time is one of your biggest assets. The further you can zoom out, the smaller the lumps and bumps might look. Day-to-day volatility can be unnerving, but it’s important to stay focused on the long term.

    2. Stay informed

    While keeping a long-term outlook is important, that doesn’t mean you should buy shares and switch off completely. Keeping an eye on developments within the companies you own, and the wider market is something all investors should be doing.

    It’s often harder to sell than it is to buy, but understanding the sell-case for the companies in your portfolio will make it easier. The day-to-day, or even quarter-to-quarter, announcements rarely change the long-term outlook for a particular share. However, if the negatives start to stack up, it could be time to think about selling.

    It’s also useful to keep a watchlist of shares you’re considering. Companies that are overvalued based on recent hype are a good example of watchlist stocks. The market can sometimes overreact to bad news in these cases, and that can create a better entry point. Shares being held back by a particular issue can also make for good watchlist stocks. Developments within these companies can make them more attractive, or cause you to scratch them off the list altogether.

    If keeping up with several companies at once makes your head spin, let our team of equity analysts help. The share research team keep pace with 100+ stocks across a range of industries. Sign up to our Share Insight email to have analysis of the latest market events sent straight to your inbox.

    Sign up to receive free share research

    3. Review your risk

    From past experience to personal preference, everyone’s unique. The amount of risk one person is happy to take might not be right for someone else. The level of risk you’re comfortable with can also change. You’ll probably be more comfortable taking more risk when investing in your pension in your 20’s than you are as you approach retirement.

    Our risk profile can change somewhat from year-to-year as well. Pay increases or decreases, new expenses and a growing family are all things that might cause you to rethink your risk appetite. Every year you should review your portfolio and make sure it’s in line with your personal attitude to risk.

    How much risk is right for me?

    4. Set targets, review them and make adjustments

    Whether you’re a seasoned investor or just starting out, setting financial goals is a key part of the process. Having a larger, long-term goal is the first step in working out what you’ll need to do each year to achieve it.

    We offer a range of different calculators to help you plan for big-picture goals.

    If you’re in your early 30’s and would like to have enough to put your new baby through university in 18 years, starting early could make all the difference. Using current prices as a guide, it’s fair to assume that a three-year degree will cost around £30,000 on tuition alone.

    As an example, let’s assume a moderate return of 5% per year after charges. If you were to save £90 a month from the time your child was born, you should have enough to fund their education by their 18th birthday.

    £90 per month at 5% for 18 years

    Scroll across to see the full chart.

    Of course, there’s no guarantee you’ll get 5% every year and it’s also possible to get back less than you invest – what you get back will depend on what you invest in. This example also doesn’t take inflation into account. So it’s important to reassess your performance every year to see if you need to change how much you’re putting in. And sometimes life can get in the way of our saving and investing plans. It’s always good to take stock of what feels right for your situation when it comes to putting money away.

    You can crunch the numbers using our regular investing calculator. Remember these targets will be estimates and they don’t account for everything, but they will help point you in the right direction.

    5. Only buy what you know

    Once you have a target in mind, you can start to build a portfolio of investments. Stock tips are a dime a dozen these days – anyone with a computer can put their two cents in. It’s easy to get caught up in the hype of ‘the next big thing’, so to keep your wits about you, remember one key rule – only invest in companies you understand.

    That doesn’t mean you need a degree in molecular biology to buy shares in a biotech company, but understanding the basics – how the company makes money, what they do with it, and how they plan to grow in the future – is crucial to make an informed decision.

    We can’t encourage you to read a company’s annual report enough. It’s your best tool to understand how a company ticks. Every industry is unique though, so it’s important to view each company through a sector-specific lens.

    6. Be boring, not bold

    5-7% returns can look like chump change when you compare it to the knock-out returns some individuals boast about in tabloids or on social media. But trying to benefit from the latest ‘big story’ is incredibly difficult.

    The meme stock craze that took hold last year is a good example of why boring can be beautiful when it comes to investing. While it was possible to earn a bumper return by timing the buying and selling of a particular volatile stock, it was unlikely. Between May 2021 and January 2022, the FTSE 350 rose 9.7%. To beat this return, meme stockholders had to sell their investment on just a handful of days. Timing the market is nigh on impossible, even the professionals struggle. Not only are your chances of getting it right slim, but it comes with a lot of chances to lose money.

    7. Know your worth

    A good product doesn’t always equal a good investment. A good product backed by a strong company isn’t even enough to justify investing blindly.

    Value is a key part of the decision-making process. Once you’ve scanned the books and are happy that you understand the business and its financial strength, it’s time to decide whether the shares are fairly priced.

    Price to earnings (PE) tends to be the most common way to value companies. It tells you how much the market is willing to pay for each pound of earnings. This is only useful if you have something to compare it to. We recommend comparing the current PE to the long-term average. This will tell you whether shares are trading higher or lower than normal. It’s also important to compare with competitors.

    If you find a great company with a PE some way above both its peers and its long-term average, it’s worth being cautious. This means expectations are high. If you believe the group can live up to these expectations, it’s worth considering if you’re comfortable waiting out any short-term volatility. When the market’s expecting big things, any small missteps can be magnified.

    PE isn’t the only way to value stocks and it might not be appropriate for all types of companies. It doesn’t take dividends or growth prospects into account, for example.

    How to value shares

    If you’re dipping a toe in the market for the first time and you’re not sure where to start, explore our new Learn section. It helps break down some of the most important concepts to give you the building blocks for a strong investing foundation.

    Investing behaviours – how to invest for success

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      Important notes

      This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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