If you are new to investing, you are in the right place.

In this series, equily co-founder Helen Lawton outlines some basic principles she followed when she began her investment journey.

My aim with this series of short articles is to share my own personal insights and set out some guiding principles I have followed on my investment path.

Principle 1: Financial Planning

If you have any debts other than a mortgage, it’s a good idea to pay these off before you begin investing. Use all the tax-efficient means available to you for investing, such as paying into a pension and, in the UK, investing in an ISA. It’s also prudent to have easily-accessible cash savings separate from your investment portfolio(s). For people in retirement, this is commonly two years’ worth of spending in cash savings; for individuals in employment, the figure is six months. Investing is a long-term activity: it aims to protect and grow the savings you have worked hard for, for a future purpose such as retirement.

Principle 2: Time Horizon

Equity markets are risky – during the 2008-09 global financial crisis, stock markets lost around 50% of their value before recovering in the subsequent years. Ideally, you should only invest in the stock market if your time horizon is at least five years, and preferably ten or more years. Over the long term (five to ten years or more), you can reasonably expect an investment portfolio to earn a positive return above inflation, and a higher return than you would have made on a cash savings account.

Principle 3: Risk and Return

The concepts of risk and return are fundamental in investing. Equities are higher risk but offer higher returns (in terms of capital growth and dividends) than safer investments such as cash and bonds. This holds whether you invest in equities for weeks or decades. It is not possible to buy an investment where you can expect high returns for low risk, no such thing exists. The higher the return you expect to make, the higher the level of risk you will also have to take.

The only way to improve your expected return for a given level of risk (e.g. having already decided to invest 60% of your portfolio in equities) is by diversifying your portfolio. Diversification lowers risk. Over the long term, equities are likely to outperform cash and bonds. But equities are also more likely to experience a a large reduction in value whilst you own them.

You should allocate the percentage of equities in your portfolio according to your:

(i) Need to make any particular return. How necessary are higher returns? Do you need to take a high risk, or do you only need to make a return in line with inflation? Equally important, are you taking enough risk? Inflation erodes cash over time, this can justify investing in assets with a higher risk/return profile than cash.

(ii) Risk appetite. Different people have different emotional responses to financial uncertainty and loss. Some people are naturally more risk averse than others.

(iii) Financial capacity to absorb any losses. Even if you are someone who is risk-loving, can you afford to take high risks and incur losses? Your life circumstances, such as your overall wealth, your age and proximity to retirement, are all relevant here.

Principle 4: Investor Behaviour

Investor behaviour also matters. Retail investors (individuals who invest their own money on their own behalf) can let their emotions and actions get the better of them, and this can hurt returns. There will always be market noise, but this does not mean investment plans should change. Market performance and headlines change far more often than investment objectives. Retail investors experience some common pitfalls. These include trying to “pick winners” (picking individual companies the investor thinks will do well), chasing past winners, trying to “time markets” (attempting to correctly time buying low and selling high), and holding onto loss-making investments without any strategy other than hoping the losses are reversed over time (this is caused by something known as “loss aversion”).

Principle 5: Investment Strategy: Diversification and Cost Minimisation

Many retail investors lack an overall investment strategy and end up with a very concentrated portfolio containing only a small number of equities, often listed on stock exchanges in the investor’s home country (“home bias”). Retail investors often ignore some asset classes entirely (such as bonds) and do not give sufficient attention to the concepts of risk and return. In addition, retail investors are often unaware of the costs associated with their investment portfolios, and unaware of the significant impact these costs have on investment returns.

You can be sure of improving your returns if you minimise costs. Controlling costs is much easier than seeking higher returns. Investors need discipline, strategy and a good understanding of what they are trying to achieve. It is tough to predict where future returns will come from, and very easy to overestimate your ability to predict such things. But you can expect to earn a benefit from minimising costs and diversifying your portfolio, i.e. holding a wide range of assets and asset classes from around the world.

Please note, when investing, your capital is at risk, and returns are uncertain. The information in these blog posts does not constitute financial advice and should not be considered as such.