General Advice
Basic considerations for your investments.
Before going into details of specific investment ideas, it is worthwhile to consider some important basic principles that are valid for all investments.
Diversification
Diversify your investments. Unless you are very sure that a certain stock will outperform the market, it is usually wise to diversify you investments across different stocks, financial instruments, industries and geographic regions.
Diversification in finance involves spreading investments over many types of investments, including stocks, mutual funds, bonds, and cash. Money can also be diversified into different fund investment strategies, including growth funds, balanced funds, index funds, small cap, large cap, and sector-specific funds. Geographic diversification involves a mixture of domestic and international investments. Diversification reduces the risk of a portfolio; it does not necessarily reduce the returns.
However, if you are making longterm investments (such as for your retirement), it is wise to mainly invest in stocks as they ourperform other investments in the long-run. The diagram below shows the maximum and minimum annual returns over a 30 year period in the last 110 years:
Keep fees low
Most banks, fund managers, brokers and advisors charge a "small" annual fee for their services, usually around 1% to 3% per year. At the same time, 80% of all advisors and fund managers are not able to create added value (so called "alpha"), meaning they are not able to beat the reference index (benchmark).
Especially for long-term investments, it is therefore extremely important to keep the annual fees as low as possible. Otherwise, the fees eat up a substancial part of your long-term profits.
To see how important low annual fees are, please have a look at the example diagram below. The example shows the result of putting 500$ per month into a fund savings plan with an annual fund yield of 7.5%. The "small" difference is that the traditional mutual fund charges a 2.2% annual management fee while the Exchange Traded Fund (ETF) only charges a 0.4% annual management fee. The difference after 30 years is very substancial: 176'000$ more retirement savings with the ETF, just because of the lower annual fee!
Read more about Exchange Traded Funds (ETFs) in our ETFs section.
Invest in what you understand
This sounds like an evident piece of advice, but is more important then ever. In today's global markets with millions of investment opportunities such as stocks, funds and structured products at your fingertips, is immensly important to know and understand what you are investing in.
Especially structured products are often very complex financial instruments that require close examination before buying. Let the person selling you the product explain in detail what the best, worst and most likely return of the product is and what the fees are. Also read the product's term-sheet and compare to what the sales person said. If after this, you are still not 100% sure how the product works, don't buy it. Please also be aware that such structured products usually contain 1.5% - 5% explicit and hidden fees, which is clearly to your disadvantage.
Make use of Cost Averaging
Stocks and funds have a certain volatility, which means that their prices go up and down on a daily basis. So when is the perfect time to buy? This question can not be answered in advance. That's why a very common strategy is to buy an investment position in several splits to avoid buying at a bad price (right before prices go down significantly):
Constant Dollar Plan / Dollar Cost Averaging is an investment strategy, designed to reduce volatility, in which securities, typically mutual funds, are purchased in fixed dollar amounts at regular intervals, regardless of what direction the market is moving. Thus, as prices of securities rise, fewer units are bought, and as prices fall, more units are bought.
The example below shows how cost averaging can give you a positive return even if the fund share price at the beginning and the end of a 10 month period is constant. Fund share price development over 10 months:
We buy fund shares for a constant amount of 100$ every month at different prices. At the end of the 10 months period, we have invested 1000$ and hold 98.45 shares worth 98.25 * 12$ = 1181.4$. So by applying cost averaging we've made a profit of 181.4$ or about 18%.
