Step by Step

By Craig Davidson, Davidsons IFA 

While completing an online investment for a client last week I came across this ID question: What is the source of your wealth?

It is an innocent enough question. Any investment provider needs to make sure you’re not investing proceeds from illegal activities or laundering money. But it opens up a myriad of philosophical questions of how we got here. The money this client was investing hadn’t come from an inheritance or a house sale. It was built up over many years from earned income, ad hoc investments when she could afford it and some regular monthly savings. And that is true for most of us. Most of us didn’t get to where we are now in one step – unless you’re lucky enough to have won the lottery.

Where we are now is a product of many decisions, some big, some small, culminating in your current position. Things happen that we can’t predict and have no control over, but by far the most important determining factor in how our lives play out is our own choices. That’s a liberating thought, because its natural extension is that we can control where we end up in the future. It’s not about relying on any one big event that may or may not happen, but rather small, daily decisions that we can control.

This logic can be applied to our savings and investments, in particular the goal of building an investment portfolio over the long term. If you don’t have a large lump sum to invest, then start by investing small amounts each month. By doing this, you will be controlling your own destiny, growing your wealth and benefiting from Pound Cost Averaging. That is the principle where each month you buy more units in your chosen investment fund. If the price of those units falls, you will see a fall in your investment value but the following month you will be buying more units than normal because those units will be cheaper than they were. You won’t see the benefit straight away, but as the price recovers, you will have more units to benefit from the higher price.

Try not to worry too much about market timing and fluctuations. Any investment of this nature is there for the long term. By investing in small, regular increments, you are moving, step by step, towards your planned goal.