Investing is often branded as something complicated but when done properly investing is incredibly simple. Think of your investments like an allotment, you need to give the plants time to grow, you need to get rid of the weeds, you want a variety of vegetables and you will occasionally need to dig up the soil to ensure the garden remains healthy.
The same principles can be applied to investing:
It is rare to get instant gratification from your allotment, you have to give the plants time to grow and flourish. The same can be said of an investment. By investing you are looking to make gains in the long term, your investment can go up as well as down in the short term (volatility) but historic trends suggest that the value should increase in the long term. Investing is about making the most of what you can save. Use an investment for those financial goals that are 5 years or more away.
Cost is like a weed, you want to keep them to a minimum as it will drain the nutrients from your allotment and damage the value of your investment. Sometimes a higher cost can mean a higher quality of service or potential higher returns. But remember you cannot truly control the returns of an investment, the only variable you can control is cost. Keep these to a minimum as cost damages your ‘real’ returns and can mean you end up with less.
Not all vegetables are in season at the same time, to ensure you have food throughout the year you have variety in your allotment. You should also have diversification in your asset allocation. Modern portfolio theory shows that the value of different asset classes does not go up and down at the same time. By having exposure to different asset classes you can protect yourself against volatility.
Occasionally circumstances in the environment change so it is wise to dig up the soil in your allotment to refresh the earth. The same can be said of the financial markets, a large political event can have a big impact on the market so you may want to change the exposure you have to a certain asset class.