Investing is necessary for most people in this day and age. The reasons may be familiar to you:
- The pension schemes are being reduced and therefore equity is needed to supplement your ‘income for later’.
- Inflation causes your future buffer to decrease too much and so a return is needed.
- The savings interest rate is too low, so your capital growth is not enough to achieve financial goals.
But if you are going to invest, how do you ensure that you have the best chance of a good return? Below you can read five tips that ensure that your return increases and prevents mistakes. The picture below is taken from the Dutch version of this article; we think you will get the message.
Forget timing
You may have heard of stock market gurus who make predictions about price developments based on analysis and their ‘crystal ball’. These predictions may tempt you to buy or sell shares. Because yes.. of course you want to avoid losing money. And in addition, you want to benefit from a rising stock market (which is supposedly expected).
Please note timing is impossible. Or more precisely: accurate timing is not possible. Be honest, do you really think there are people who now know what’s going to happen tomorrow, next week or next month? Unless Back 2 The Future (an American film in which the main character can travel to the future) becomes true, it is not possible to know what is going to happen. It’s coffee grounds watching, glass ball expertise and laying on of hands. Not something to build your wealth from. Because no one knows what is going to happen, it is unwise to act on predictions. The chances of it being wrong are as high as they are right. Please let that not form your strategy to build wealth. Research shows time and time again that if you try to time, it results in significantly lower returns. This is because you have to be right twice. The first time you have to buy shares at the right time, because you expect a decline. The second time you have to buy shares again at the right time, because you see an increase coming. Choosing right twice is extremely difficult.
Diversify
The classic DIY investor finds it interesting to invest in stocks that are known. In the past, these were often Dutch companies such as Heineken, Philips and Ahold. After all, we knew those companies because we drank a Heineken beer while watching television with a bag of chips that was bought at the Albert Heijn.
Nowadays, DIY investors are more likely to opt for companies across the border, such as Tesla or Netflix. This seems logical, but it is risky. This is because diversification is needed to greatly reduce the risk. An example: in 2021, Philips was in the news because their sleep apnea device did not work as promised. This has direct consequences for the share price. If you invest a large part of your assets in Philips, you will suffer from this. However, if you spread the capital better, you may not notice the decline in the Philips share. It is therefore often wise to invest in hundreds of different companies worldwide; this lowers the risk without you missing out on much return.
Invest periodically
An important part of a desired return is how you experience the development of your assets. This may sound a bit vague, but it’s pretty simple: if you see your wealth growing, then you probably have less of a need to adjust your portfolio. In other words; you won’t be constantly buying and selling. By depositing money monthly, you see that your assets increase. If you were to graph the development of your assets, you would see an upward trend. This creates a good feeling, which keeps your emotion positive.
Investing is done with long term focus
In recent years, the number of investors has increased enormously in the Netherlands. This is partly due to the good returns on the stock market. Some new investors expect high returns in the short term. I saw Finfluencers (financial influencers) assume average returns between 10% and 30% per year. In addition to being very unrealistic, it also means that returns are often sought for the short term. That is ‘speculating’ and not ‘investing’. If you put money away for the longer term, you do so to benefit from the growth of companies. This takes time. Sometimes people underestimate long-term returns and overestimate short-term returns.
Always invest with a plan
Investing without a plan is like cappuccino without milk. It doesn’t add up and doesn’t make sense. Investing without a plan means that you just do something. Investing is then the goal, while that should be the means to achieve the goal. Successful investors first provide financial peace.
This means that there is always a savings buffer for unforeseen expenses and that investments are made for the buffer in the long term. The financial plan provides a path to the goal and helps to set up a portfolio that delivers enough return. It ensures that you do not take too much risk and that your expectations remain realistic.
Do you want to benefit from these tips? Schedule a meeting with us via mvanteijlingen@yourfinancials.nl or +31 629 550 691. We are convinced that investing is important and must always be well-founded. We are happy to help you to a good investment experience.