Every investor wants to be successful. Over the next few months, you can read about ways to improve your investment strategy.
Defining success against the performance of others can encourage a short-term mindset
What “success” means when investing is different for everyone, and defining what it means for you is crucial.
You might be tempted to measure success by achieving a certain average annual return, selecting the best-performing stock, or beating market averages. While these can be useful indicators of your portfolio’s performance, defining success by these measures may not be the best approach.
These definitions of success could even be harmful, as they may encourage short-term thinking.
For example, in a bid to choose the best-performing stock in an index, you might be tempted to make knee-jerk decisions based on the latest headline or piece of information you’ve read. Constantly adjusting your portfolio to reflect short-term movements could mean you miss out on larger trends that may benefit your portfolio.
Rather than measuring the success of your investments against what others have achieved, focusing on your reason for investing could be useful.
How investing success could support your wider goals
Investing can feel like a competition where you need to beat the returns of others. However, this mindset might not align with your needs. For instance, if you set out to beat the average annual returns of an index, you might decide to take on more investment risk than is appropriate for you.
Rather than seeing investing as something you need to try to “win”, viewing it as a tool to support your financial goals can be useful.
The aim of investing is to support your wider goals, so starting with your reason for investing could provide some clarity on what “success” means for you.
Imagine you’re investing in your pension to create financial security later in life. Success might be creating a pot that will provide a sustainable income of £40,000 a year from the age of 60.
To do this, you may calculate that you need to achieve an average annual return of 5%. If you focus on success as a competition, rather than the desired outcome, you might be tempted to chase higher returns even if doing so could place your retirement at risk.
These four factors could help you define what investment success looks like for you.
1. Your investment purpose
Setting out a well-defined goal can give your investments purpose. This goal can then inform the decisions you make and allow you to see if you’re on track for success.
Without a clear goal, you might choose investments that aren’t aligned with your needs, and place your chance of success at risk.
2. The investment time frame
As well as your reason for investing, you should also define when you want to achieve the goal. If you’re saving for retirement, when do you want to give up work? Or if you’re investing on behalf of your child, when do you plan to give them access to the assets?
The investment time frame is important for two key reasons.
First, it’s important for the success of your goal. Saving enough for retirement, but reaching that point five years later than you’d hoped, could be disappointing even though you’ve reached the target amount.
Second, the investment time frame will affect what investment strategy is right for you. As a general rule, the longer you’ll be invested, the more risk you can afford to take. However, other elements of your finances will also affect your risk profile.
3. Your risk tolerance
All investments have some risk involved. However, the amount of risk you take varies between different assets and opportunities. As a result, it is possible to invest in a way that reflects your risk profile and circumstances.
As well as the investment time frame mentioned above, factors like your current financial situation, the other assets you hold, and your attitude to risk may play a role in determining your risk profile. Your financial planner can help you understand your risk profile.
4. The required investment return
With a clearly defined goal and risk profile, you can estimate what returns your investments may deliver and whether they’ll support your goal.
You might find that you’re on track, which could offer peace of mind. Alternatively, if you discover a shortfall, you might adjust your target or take steps to close the gap, such as increasing the amount you invest each month.
Keep in mind that investments experience volatility. Annual returns will likely rise and fall each year, and it’s often sensible to focus on long-term trends when reviewing your success.
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Next month, read the next successful investing blog to discover elements you might consider when building an investment portfolio for success.
Please note:
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.