Don’t invest a penny until you’ve read these 11 key rules

Today, as part of the new Telegraph Money website, we embark on a relaunch of our investing content. In harmony with the aims of the broader Money site, our goal is simply to help readers make better investment decisions.

If you have never invested a penny in your life, don’t panic: we seek to make everything we publish intelligible and useful to readers of every level of experience, from the absolute beginner to the reader who has been investing for decades.

This introductory piece endeavours to live up to that aim by listing our key rules for investors at either end of the experience spectrum. 

For first-timers, we hope our rules will set out some of the most important guidelines to ensure you avoid the pitfalls of investment, of which there are many; for the experienced, they may serve as a reminder of principles that we can lose sight of when we become embroiled in the detail of individual investments, not least because “information overload” is an ever-present risk.

Here then, are investment’s 11 most important rules.

1. Be in it for the long haul

Investment is a long-term game. If you cannot tie up the money you are thinking of investing for at least five years, it’s not right for you.

This is because the value of financial assets such as shares can fall dramatically and without warning. Fortunately, this is rarely the end of the story and markets almost invariably recover and, indeed, rise further – this, after all, is why we invest. 

However, that recovery can take time, perhaps years. Anyone who invests for a shorter period is taking a big risk.

2. Set your goals at the outset

Before you invest a penny, take the time for an unhurried assessment of your financial circumstances, and what you want to achieve by investing some of your money. 

Write down how much you can afford to invest (either monthly or as a lump sum), how long it will be before you will need to use the money you invest, what kind of returns you would like to achieve and what kind of losses you could tolerate if things went badly – and there is always that possibility.

The last point is especially important. Large losses can cause disruption to your life, an end to peace of mind, relationship trauma and more. 

Be honest with yourself (and your family) about the worst that could happen and how you would react. There’s no shame if you decide that the risks are not for you and that you’ll stick to cash savings instead.

Review what you have written a week later to make sure you are really comfortable with it, and revisit it from time to time in the years ahead.

3. Accept uncertainty

We said above that markets invariably recover. However, it’s not certain that the future will always follow the patterns of the past, and it’s not certain that every individual investor will recover his or her initial losses – it depends on what exact assets are involved and what price was paid for them.

This is all to emphasise a key fact: there are very few certainties when it comes to investment. 

An acceptance of uncertainty on various fronts – over the economy, over the performance of individual businesses, over how markets value your investments – is essential.

4. Diversify

If all the above sounds too negative and a list of good reasons not to invest, it’s time to remind ourselves that investors have two key tools that, used together, will almost certainly make them richer.

The first we have already mentioned: time. If you can invest over a period measured in decades, you are very likely to have made good returns when the time finally comes to use the money you have tucked away.

The second tool is equally vital, however: you need to spread your money among a variety of investments. 

Imagine, for example, that you have just read a positive write-up of a particular company – in a newspaper share-tipping column such as our own Questor, for example – and are tempted to put all your money into shares in that company. 

This is a recipe for disaster, and is to be avoided at all costs. There are simply too many things that could go wrong, even at the best run business.

Instead, if you have decided to invest all your money in the stock market, spread the cash among at least 10 stocks, and ideally more. 

First-time investors, unless they are prepared to devote serious time and effort to the study of companies and the stock market, are likely to be better off investing in funds – ready-made portfolios of shares or other assets.

Some investors – the younger ones and those with higher tolerance for risk – may well want to put all their money into the stock market (whether directly or via funds), as shares have historically produced the best returns. 

Investors closer to the time when they will need to withdraw their money, and those with less tolerance for risk, will probably want a portfolio that is a mixture of stocks, bonds, cash and perhaps other assets such as property (which you can invest in via funds).

5. Save tax – use Isas and pensions

The taxman treats investors pretty generously. British residents can invest up to £20,000 a year in Individual Savings Accounts (Isas), which means that no income or capital gains tax will be due when your money is growing or when you take it out.

You can also put up to £60,000 a year into a pension. Here, if you are a taxpayer, HMRC will actually top up your contribution with the tax you would already have paid on your income. The money can also grow tax-free, although withdrawals from pensions, unlike from Isas, are taxable.

It makes great sense to invest within these vehicles.

6. It can be as simple or as complex as you want

Some who have read this far may be saying to themselves “goodness, it all sounds so complicated”. Investment can indeed get very complicated, but it doesn’t have to be. 

If you want a simple life but still be able to share in the returns that investing can bring, choose funds rather than shares and, if you want to keep it really simple, buy a fund that simply tracks the stock market.

Markets tend to rise over time (even our own FTSE 100 index, which looks flat over decades at first glance, has produced decent returns if you remember the dividends paid by its constituent companies), so a “tracker” fund can be a perfectly sensible choice.

They are automatically diversified, but you can go further down that path if you buy a fund that tracks the global stock market.

Tracker funds that invest in bonds, and even property and other assets are also available, so you can build a diversified portfolio with these simple tools.

7. Costs matter, so keep a keen eye on them

While you can avoid tax, it’s very hard to invest without some costs (it’s still just about possible to buy shares in the form of certificates, which involve no custody charge, although you cannot do so inside an Isa, so you’d lose the tax benefit). 

So monitor how much your funds cost you – the fund management company makes an annual charge – and how much you are paying the company through which you buy and hold your investments, variously known as the platform, fund shop or stockbroker. 

Cheapest is not always best, so consider the service you are getting, too – but keep in mind that a small-sounding cost such as 1pc a year will have a huge effect on the eventual size of your investment pot if you pay it every year for decades.

8. Monitor progress (but not obsessively)

It’s probably best for your own peace of mind to avoid checking on your portfolio’s progress every day, but the occasional review is a good idea. Watch for any sign that investments are not performing as you had hoped.

If you own shares in individual companies you should keep a constant ear out for any news that could change your view on their suitability or prospects; if, on the other hand, you own only a global tracker fund, you can probably afford to be much more hands-off.

9. Beware of fads

Every now and then an investment fad takes hold. Be very wary of committing serious sums of money to anything that seems to be the next best thing – it is the nature of markets (and of the human emotions that drive them) to quickly push the valuations of such assets to unrealistic levels. 

Sooner or later reality will reassert itself and the price will come back down to earth. You are much more likely to make good money by buying solid investments that are temporarily out of favour, often as investors put all their money into that latest faddish asset.

10. Keep quiet

If you tell your friends and family about your investment decisions, you may find it harder to change course when circumstances dictate for fear of looking indecisive. Even professional investors have admitted to this weakness. 

Say you decide to invest in Acme plc, and then decide a year later that you have made a mistake, you will find it easier to sell if no one else knows about it.

11. If you don’t understand it, don’t invest in it

For anything you invest in, you should have a sound idea of the likely risks and rewards and how they will be influenced by external circumstances, such as the state of the economy. 

How could you form such an idea if you don’t understand the investment in the first place?

This is not to say that you need to understand, for example, every detail of Nvidia’s advanced AI microchips. But you should know what the company sells, why customers buy its products, who the competitors are, and what could change in the future. 

How will you know? See if you can explain it to someone else.