HOW TO APPROACH INVESTING
Whenever an individual takes a serious interest in investing – early or late, whether they catch the investing bug or have their hand forced by circumstance – here’s one framework on how to address the key issues.
1. Should You Use an Advisor?
For those inclined toward a do-it-yourself (DIY) approach, you should be honest about whether you have both the time and the interest to give investing the attention it needs.
Beyond that, you’ll need self-awareness, to know what you’re good at and where your weaknesses lie, and at least a baseline level of skill. At a minimum, you should avoid common mistakes – mistakes such as buying high and selling low, having all your investments in a single area (or “all pointed in the same direction”), or leaving long-term money forever sitting in cash.
2. What Is Your Investment Timeframe?
Your investment horizon is perhaps the most important factor in determining what you should invest in. Simply put, only long-term money belongs in equities. That means funds you don’t plan to touch for a decade or more.
Equally, equities should form the bulk of your long-term money – especially given that traditional bond markets currently offer limited appeal (with the possibility of sticky inflation, not to mention an excess of global debt).
3. What Is Your Attitude to Risk – and What Are You Really Investing For?
Do you enjoy the thrill of big wins? Is keeping up with your neighbours very important to you?
There’s nothing wrong with either of those, but unless you genuinely enjoy high-stakes investing, most people are better served by a sensible strategy rather than a spectacular one.
A key mindset shift is learning to embrace the concept of “enough.” Success doesn’t mean extreme riches – it means achieving your objectives, like a secure retirement or financial independence, without taking unnecessary risk. That means thinking in absolute not relative terms, and preserving as well as growing your capital – to meet your needs, not just to beat the market or your peers (especially those holding lots of cryptocurrencies).
And of course, circumstances change. As you approach the time when you need to cash out some of the money, you can and should flex towards taking less risk. This could involve a shift in style, moving towards stocks that are less risky, or in asset allocation, slowly taking resources out of equities. What’s optimal will evolve over time.
4. Where are Your Liabilities?
Aligning your future liabilities to your investments is only sensible. As an example, here in the UK, many British investors have 70% of assets investing in the USA, as per the global index, and less than 5% in the UK. Do you need that level of currency risk?
5. What Are Your Values When It Comes to Investing?
Many investors overlook the fact that stocks represent real companies – businesses that provide goods, services, and jobs. Investing is not just a financial activity. It’s a form of participation in – and influence over – the economy and society at large. If stewardship, sustainability, or long-term value creation matter to you, consider whether your portfolio reflects that.
This means choosing to invest at least a portion in actively managed funds or individual companies whose missions you support, rather than relying entirely on passive index funds or algorithmic strategies that take no account of corporate behaviour or impact.
6. Do You Understand Market Dynamics and Cycles?
Markets behave differently from most parts of the economy. In the short term, they are price-driven not fundamentals-driven. This price feedback mechanism means markets can become distorted. In the stock market, it leads to a crowding effect – too many existing holders and too few new buyers. In the real economy, it can lead to overinvestment, excess supply, and shrinking profits.
This leads to another observation, one of the most overlooked principles among many novice investors, that a great company is not always the same thing as a great investment. If you heavily overpay for a stock – no matter how brilliant the business – you may face years of underwhelming returns. For instance, 25 years later Cisco Systems remains below its peak price in 2000. Price matters.
Next, diversification doesn’t just mean spreading your money across sectors or regions. It should also include a mix of investment styles – value, growth, momentum, mean reversion, income – and a clear-eyed view of what’s going on: what’s cheap but might improve, what’s expensive but deserves to be so, and especially what might be about to change direction.
Lastly, there’s fear. Amazon has been an amazing investment. But in the early 2000s the shares fell 90% before recovering – what’s the chance you threw in the towel on Amazon when the share price chart resembled the west side of the Mariana trench? Many did.
Dynamics like these, and how you react to them, will dictate your investment outcome.
Conclusion
These questions provide a practical lens through which to examine your financial decisions – and hopefully lead you to more satisfying and longer-lasting decisions. That’s what will give you the best chance of building a portfolio that’s not only profitable, but also resilient, and aligned with what truly matters to you.