5 rules for long-term investing

Warren Buffett famously has two rules for investing:
1. Never lose money.
2. Never forget rule number one.

In June 2015 he was worth an estimated $69.4billion, yet those two rules do seem somewhat idealistic considering the risk involved in investing.

Time in the market is the most valuable thing to an investor. The earlier you start saving for the future the better, but there are a few rules you should live by.

Rule 1: Take advantage of tax wrappers such as ISAs

It is best to consider a tax efficient home for your savings to start with. There are tax benefits on savings in the shape of ISAs and Pensions in the UK.

The right tax wrapper for the individual will depend on what you are saving for. In 2017/18 you can save up to £20,000 in a tax-free ISA, this can be split between cash and stock and shares. ISAs are more flexible than pensions as the money isn’t locked away.

With a pension, the earliest you can access your money is 55, ISAs can be accessed at any time although some providers may encourage you to put it away for a fixed term.

Rule 2: Reinvest your income

The longer the period of time you put your money away for the more you will earn. It, therefore, makes sense to put aside a proportion of your salary each month, but not only this, any money you earn on your savings should be reinvested. This will help to create a larger base from which your savings can grow.

Rule 3: Diversify your portfolio

A strong investment portfolio is made up of a range of assets because the value of different asset classes rarely goes up and down in sync. Investors have a choice between equities, bonds, commodities and currencies; all across numerous geographical areas.

By ensuring a portfolio is made up of a combination of these returns will typically be a lot more steady over the long-term as your exposure to the volatility of a particular asset class is reduced.

Rule 4: Understand your timeframe

Your timeframe can indicate how much risk you can be exposed to. The short term is generally 1-2 years, the medium term would be 3-5 years and the long term is anything over that. If you are investing for the long term you may want to consider a higher level of risk to increase the possibility of returns, the longer time frame will allow you to absorb any bumps in the marketplace.

Rule 5: Be aware of the costs of investment

There is generally a management charge for investing, these vary by provider and sometimes there are entry and exit fees and even performance fees and these can eat into any potential returns. Make sure you are aware of these and comfortable with what you are being charged. It may be worth swapping to a lower-cost provider to maximise your long-term returns.

1 Business Insider, 2015