Thought Leadership

22 May 2017

7 golden rules of successful long-term investing

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By Pau Morilla-Giner

“These are unpredictable times. Investors need a level-headed approach from a wealth manager they can be confident will make independent, considered decisions on their behalf, focusing on long-term resilience rather than short-term gains. In the following pages, I set out my golden rules for successful long-term investing." - Pau Morilla-Giner, Chief Investment Officer, London & Capital

RULE NUMBER 1 - Diversification

Investing should not be a game of chance. Risk is inevitable but it can also be managed. Investors who diversify can manage risk far more effectively. Investors should diversify across different asset classes, as well as within each asset class, for example holding a broad spread of shares from different sectors and geographical locations.

RULE NUMBER 2 - Asset allocation is key

Many people focus on individual stock tips, but of far more importance is what proportion of your portfolio is in equities, bonds, cash and so on. Research has shown that asset allocation accounts for over 90% of overall returns.

RULE NUMBER 3 - Focus on the long term

Generally, the longer the holding period of your investments, the better the returns. If you keep your eye on long-term goals you can avoid worrying unduly about day-to-day volatility, which is part and parcel of stock market investing. Over longer periods, volatility flattens out and the power of compounding returns comes into play.

RULE NUMBER 4 - Don’t panic when markets fall

It is human nature to try to protect ourselves from danger. We see examples of this when investors sell investments during falling markets, effectively locking in losses. Loss aversion is a powerful impulse that can lead to significant investment mistakes.

RULE NUMBER 5 - Don’t be greedy

It’s when markets move in your favour that investors need to be most alert. Focus on fundamentals and don’t have unrealistic expectations about returns.

RULE NUMBER 6 - Don’t follow the herd

Ignore the ‘noise’ from other investors or the media. Stay focused on the reasons you chose to invest.

RULE NUMBER 7 - Keep it simple

This applies as much to complicated investment schemes as it does to individual shares. If you can’t see how a company makes its money, think twice about investing in it.