Ten simple (but important) principles for smarter investing

In this piece, our special contributor and Daily Telegraph investment columnist David Stevenson explores the core principles for smarter investing amid behavioural economics, time horizons and costs, in order to set an effective investment strategy.  

A few years ago, I was talking to a well-known private banker whose client list included many of the most successful names in business and the city. As it was an off-the-record, background conversation, we talked openly about great and the good. But then a pearl of wisdom dropped into the chat: “You do realise that most of my clients are absolutely terrible at their personal finances, especially investing, and especially if they work in investment. We call it the PA (personal account) amnesia. All the things they say are important to everyone else, they forget themselves”. I’m now convinced this is generally true – all the so-called experts (me included) are frequently lazy, and stuck in their ways when it comes to their PA. 

My point here is that as we start the new year, remember that everyone else struggles with the boring stuff around finances, and particularly investment discipline. We all assume we are rational, efficiency-maximising types who do things according to the book, but behavioural economics teaches us the exact opposite. We all have different attitudes to investing, risk, and opportunity, and these profoundly shape how we build wealth through ISAs and pensions. 

Over the years, I’ve written a few books on the topic of better investing (most recently Investing for Dummies), better investing behaviour and talked to dozens of financial gurus, and here are the 10 lessons I’ve learnt – and not always applied personally.

1. Not too much cash, but certainly enough

Most experts suggest a simple rule: have six months’ expenses as cash in reserve to deal with all eventualities – and if it makes sense, keep that cash reserve in a Cash ISA. It also makes sense to have some cash for another purpose – investing. I know of virtually no professional fund manager who runs their portfolio with 100% invested. 

Sometimes there’s a constant influx of regular savings that sits around as cash before being invested. Over a longer period, many investors choose to keep a buffer of cash in their portfolios, for various reasons: waiting for good opportunities or new ideas. But don’t get too carried away with having too much cash sitting around in your investment portfolio (a sin I am guilty of for full admission). As we’ll discuss very shortly, what really matters is time in the market. If you want to take the risk of investing (rather than saving), then invest. Don’t dither and keep too much of your wealth in cash!

2. Start with outcomes and work backwards

This is a crucial insight. Most people I know automatically assume that investing is always about finding the next big thing (say, an Artificial Intelligence superstar corporation) that you can make lots of money on, i.e., capital gains or growth. But many investors don’t have that as their only endgame. Some investors simply want a regular, steady total return that is more than cash but not as volatile as risky tech stocks (which can shoot up in value and then crash and burn). 

These more defensive types might be attracted to different strategies, such as defensive or even absolute returns strategies (positive gains in all markets, up and down). Others might want income, for instance, which grows over time (we’ll talk about dividends later) or just some income and some capital growth. Whatever your strategy, define your outcome early on and then stick with a plan to achieve that. 

3. Time horizons (and liquidity) matter 

Another rough and ready reckoner used by academic economists I talk to is that your time horizon matters when it comes to deciding ‘what’ to invest in. If by investing you want a (hopefully positive) result in under three to five years, at which point you’ll need to ‘realise’ that investment, avoid equities or shares and stocks and think instead about fixed income, perhaps or even cash. 

If your objective is slightly more ambitious with a horizon between five and 10 years, a balanced approach is typically most suitable. This involves a strategic mix of lower-risk assets, such as bonds, and higher-risk assets like stocks, to pursue growth while managing potential volatility.

For timescales exceeding 10 years, your time horizon becomes a primary factor in assessing the suitability of a 100% equity portfolio. At this stage, you can often afford to look past short-term market fluctuations and maintain a full allocation to equities, as the extended duration provides the necessary window for compound growth and recovery from any market downturns.

Ultimately, for enduring success, time in the market is far more critical than trying to time the market. Remaining patient and staying invested throughout the economic cycle is the most effective way to capture long-term structural returns.

4. Don’t market time and screen out the macro talk

I’ve lost count of the number of academic studies showing that most investors fail when they try to time the market by constantly scanning macroeconomic data and market insights. For a few, really dedicated investors using these data sources – broadly called macro and market data – can provide real value, if done properly and methodically. But it’s generally a losing strategy. 

Just stay invested in whatever your strategy is, and crucially, forget about constantly checking the news feeds. I’d even go so far as to say that if you find yourself checking how much money you’ve made on your investments on a daily basis, you’re making a mistake. Tune out to market noise, stick to your principles, and stay disciplined.

5. Think about a core-satellite split

My advice in the previous paragraph is based on a rather idealistic assumption that all investors will stay disciplined, avoid market timing and stop speculating. The reality, as we all know, is that we are susceptible to great ideas, reading articles, and suggestions by friends. We have behavioural biases. 

One way to manage this is to adopt a core-satellite approach. In your core portfolio, the larger part of your investments, you are my rational investor who ignores trends and ideas and just gets on with investing for the long term. But maybe also have a smaller satellite portfolio where you self-consciously play with ideas, trends and themes – maybe even indulge a bit of market timing if the fancy takes you. 

6. Diversify your investments

At the moment, there’s a lot of commentary about how the stock market is very focused on US stocks, particularly a handful of US tech stocks in the AI space. This reminds us that stock markets go through constant phases of over-concentration. That’s not a bad thing if you have successfully invested in those outperforming ideas, trends, and stocks. But it does remind you of the need to diversify, especially to mitigate downside risk. 

Concentrated returns are risky because there’s another law in economics called mean reversion: all good things eventually come to an inglorious end as things return to ‘normal’. Make sure you’ve thought through your geographic, sector and asset class risk, i.e. am I too exposed to just a handful of US stocks? Could I have more exposure to some European and UK stocks (which outperformed in 2025)? Could I also have some exposure to more boring fixed-income investments like bonds? 

But don’t overdo the diversification. Don’t have so many themes, trends, ideas, funds and so on that you have no actual strategy, just the noise of too many investments (another vice I am guilty of). 

7. Dividends do matter, even now

This is a slightly narrow lesson, but an important one, and it follows from my earlier point about mean reversion. Talk to enough academic economists who’ve looked at the very long term of investing in shares (equities), and they’ll tell you that for different decades, some of the total return from risky stocks and shares comes from capital gains, and some from dividends. The relative shares of each vary over decades, but over the very long term, their progressive increase (and your reinvestment of those dividends in the underlying stock) are major contributors to total returns. 

In simple terms, dividends matter, especially if you reinvest them. Now, the point about mean reversion is that over the last decade, dividends for US equities haven’t been that important. It’s all about capital gains and momentum. But history teaches us that at some point this will change and dividends will matter more (probably in a less bullish market). And besides, in other geographies, dividends are much more relevant. 

8. Costs really do matter

We now come to the really boring bit, costs. Back to my private bank supremo, who also joked that “thank god my clients never really dig too deeply into the total cost of our service”. By this, he meant adding up the direct charges as well as the other ancillary charges hidden in the small print (I’m thinking FX fees, for instance, or lower-than-average cash interest rates). 

These all mount up and for too long too many clients of big wealth advisory firms have been charged anything between 1 and 3% per annum in total costs, fees and underlying expenses. Maybe in some cases all the extra advice was worth it, but I have my doubts. Go through your statements, check the fees and work it out.

9. Save and invest as much as possible, often

Again, another really boring but essential point: save and invest as much as possible, as often as possible, because you’ll need an end number that might be bigger than you think (see the last point). This involves lots of what I call the marshmallow test – a famous psychological experiment designed to measure a child’s ability to delay gratification. Originally conducted at Stanford University in the late 1960s and early 1970s by psychologist Walter Mischel, it has become a foundational study in understanding self-control. The key point is to save for the future and avoid immediate temptation, which is sadly much easier said than actually achieved. 

The workaround is to set up rules and then stick to them religiously. You’ll see it in all the “get-rich-quick, rich-dad-poor-dad, self-help” books. Force yourself to save just a little bit more than you might otherwise. And do it as often as possible. The default is to save monthly (a great discipline), but I’ve also, over the years, used clever tech in apps to do round-up saving or daily sweeps (save £5 a day). 

10. Have an end number in mind

I’ve left what I suspect is the most depressing bit to last  – what’s the end number? I say ‘depressing’ because I can probably bet that the number (the final portfolio value) you’ll need in a few decades’ time, say, when you retire (assuming your time horizon is that long), is much bigger than you think. Every few weeks, as a benighted member of the financial press, I get some press release from a big financial institution which consists of a financial model, which in turn spews out a number you’ll need to retire ‘comfortably’ on. 

It won’t surprise you that the “magic number” for retirement keeps climbing. Not long ago, estimates for a single person sat around £600,000; then they jumped to £1 million, then £1.5 million. It’s easy to find these escalating figures discouraging, and you should be naturally sceptical of generic surveys – especially when your retirement is decades away. Predicting the world 50 years from now is a challenge for anyone.

At Moneyfarm, we move beyond these static, often spurious estimates by using Guidance+, our sophisticated cash-flow modelling tool. Rather than guessing, we incorporate expected long-term inflation into your plan, allowing you to see your future expenses and purchasing power in today’s terms. This ensures your target isn’t just a random big number, but a realistic reflection of the lifestyle you want to maintain, adjusted for the economic realities of the future.

Nevertheless, having a target sum to aim for in your savings and investing is a great idea – and there are lots of simple-to-use compound interest and investment calculators online as well, which will help work it all out. You could, for instance, say that in ten years’ time you’d like to have saved a notional £100,000. To work out how to achieve that, you could do some simple back-of-a-cigarette-pack modelling. Save £100 a month and then assume 7% per annum annualised compound growth (a perfectly feasible equity return on average). At the end of ten years you’d have £17,201. Save £580 a month, use the same parameters, and hey presto, you’d have a shade under £100,000. 

And bear in mind that the average net after tax income per annum for an individual in the UK is around £30,000 or £2,500 per month. Assume a 20% saving rate (a possibly heroic assumption, namely that 20% of your net after tax income is saved and invested), and you’ve got not far off your £500 plus per month (I’ve ignored any auto-enrolment pension contributions). As an aside, after 30 years, that £580 per month equates to a total pot of a shade under £700,000, which in times past has been mentioned as a sensible target sum. 

But, and you knew there was a but coming, that return is a nominal return before tax. It doesn’t include the declining value of money invested over time, in other words the impact of inflation. Here in the UK, inflation has tended to hover around the 3 to 3.5% range. To conclude, you need to consider the real value of the final sum after allowing for inflation. 

Please remember that when investing, your capital is at risk. The value of your portfolio with Moneyfarm can go down as well as up and you may get back less than you invest. Past performance is not a reliable indicator of future performance. The views expressed here should not be taken as a recommendation, advice or forecast. If you are unsure investing is the right choice for you, please seek financial advice.