The golden rules of investing

The market is always changing, with developments around new products, innovation, and geopolitics to consider. But interestingly, the behaviours that lead to successful investing have looked very similar throughout the years.

These behaviours are just as important for someone that’s been investing for 30 years as they are for a first-time investor. No matter how experienced we become, we can often do with a reminder of the basics. Here’s 10 rules I always come back to.

1) Time in the market is better than timing the market

There will always be something that you and the markets are worrying about, but it’s impossible to know when, or even if, that worry will come to fruition. If you wait for the ‘perfect time’, you’ll never invest.  

Even if you don’t end up timing the market perfectly (which people rarely do), there’s still strong return potential. And while you’re trying to avoid a market drop, there’s also a chance you miss an upswing. A study by Invesco showed that missing the best ten days of the market in the S&P 500 from 1994 to the end of 2024 would decrease annual returns from 11% to 8.1%.

For reference, a £10,000 investment over 20 years would become £80,623 at a growth rate of 11%, but just £47,480 at a growth rate of 8.1%, before fees.

2) If you cannot spend time researching investments, don’t guess

It might seem like a good start to invest in a company that you are familiar with, like a popular brand. But you need to consider the balance sheet and valuation of that company, as well as how it fits into the other investments you hold.

For many people, passive investing ends up being the better option. If you invest passively, you can simply pick an index, or a few indices, where you’d like to invest your money. Because your investment will be split between hundreds and sometimes thousands of companies, you spread your risk, allowing for a much smoother ride as an investor. This method is often cost effective, time effective, and still usually beats out those that try to pick their own portfolio.

3) Before you choose an active fund manager, make sure they are worth it

Active fund managers are investment professionals that choose a group of stocks based on research from a team of analysts, the market environment, and speaking to people who run the companies they invest in. This might sound like a pretty fool-proof way to choose stocks, but despite the process, many fund managers still end up underperforming the passive funds tracking an index in the same sector.

While investing with an active manager gives you the chance to beat the market, it certainly doesn’t ensure that they do. And because choosing an active fund manager can often come along with higher fees, it’s important to make sure that they are the right choice for you. You can find more information about the fund you’re considering by looking at its Key Information Document (KID), and you can look at how the fund has performed lately. But remember, past performance doesn’t guarantee future returns.

4) Understand what role each holding plays in your portfolio

You can imagine your portfolio like a jigsaw with each holding representing a piece of the full picture you are trying to make. When we’re investing, it’s often for some type of goal. This could be a first home, retirement, or wanting to create your first £10,000 in the market. Ensuring that your investments are appropriate for the goal you’re trying to achieve, and that they work well together to make that happen, is essential.

5) Avoid the illusion of diversification

A portfolio of holdings all exposed to the same risk factors or economic scenario is no diversification at all. If all your holdings look similar, because they are in the same region or sector, for example, you may find that you’re much more vulnerable to volatility in the market. When the holdings in your portfolio are playing different roles instead, they have a better chance of balancing each other out and not reacting the same way when something happens in the market.

6) Resist the temptation to tinker

Human psychology means that we are predisposed to doing something but remember that choosing not to act is an investment decision in itself. This often comes up when there’s a tumble in the market. It may feel like the smart thing to do to take your money out of the market and preserve what’s left, but the problem is that you can just as easily miss the market recovery, which can happen quickly. It’s very difficult to time when this is going to happen, so historically, it’s often been better for investors to just sit tight and ride things out.

7) Don’t fall in love with your investments

If there’s a holding in your portfolio that’s performed very well in the past, or is simply a stock you like, it can be easy to want to hang on to it. But remember you’ve not actually locked in the gains from that investment until you sell it. This can be important as well for keeping a balanced portfolio, where a single investment isn’t dominating the others.

This doesn’t mean selling an investment as soon as it has a weaker period, because there will always be ups and downs in performance, but knowing when it’s time to let go is important. Often, investors will set out rules for themselves on the outset of the investment to make sure they don’t get overly attached. Reconsidering the valuation of that investment can also be a helpful way to determine if there’s really much more for the investment to give, or if it’s run its course. There should be no sacred cows in a portfolio so if a holding needs attention, then act.

8) Always understand which holdings will protect you if you are wrong

None of us will make the right call all the time, and if you don’t have any investments that can prosper when the outlook changes, you aren’t properly diversified. You can choose to diversify in lots of different ways. For some people, this may mean holding some of their assets in bonds or alternatives such as gold. For others, especially those who don’t plan to use the money they are investing any time soon, they might diversify within equities, such as by investing in different regions or through a mix of income and growth focussed assets.

9) Have a look at unfashionable areas

Stocks that are in flashy parts of the market might get more coverage, but it doesn’t make them the best investment. The crowd are often wrong and focusing on areas people dislike can provide a wealth of ideas and build in natural diversification. If you’re looking at a market sector like AI, which is fashionable among investors right now, stock prices can end up largely being at the whim of the crowd. But by looking to other areas, you might be able to find more stable investments that are less affected by changes in those ‘popular’ areas of the market.

10) Rebalance your portfolio regularly to lock in gains

A systematic approach, like having set values for buying and selling and a set of rules when you start the investment, will help manage your emotional biases. This way, you can adopt a ‘buy low, sell high’ strategy. Rebalancing also ensures that your portfolio remains diversified. Even if you start out with a diversified set of holdings, if one area does very well, you may find in a year’s time that it has become a disproportionately large part of your portfolio. By rebalancing, you manage this risk.