It has been quite a year for stock markets. In the past 12 months shares have soared to record highs; higher than the tech boom in 2001, and higher than the credit bubble of 2008.

But let’s not get carried away. Being disciplined with an investment strategy is as important when times are good as when times are bad, but in some ways the excitement of a rising market makes it harder. Here are three things that investors should remember while they are enjoying a rising market – and what we do about each one.

1.       Maintain the right balance of investments.

Every investor should have a carefully considered mix of assets with the appropriate proportions of (and within) cash, bonds, shares, property and so on. But as the value of each asset class rises and falls at different rates, these proportion drift. Maintaining the intended balance is important because your allocation of assets is one of the bedrocks of the strategy that will help you reach your goals. So we rebalance our investment portfolios regularly by trimming the things that have performed well and adding to the things that have lagged. This might seem counter-intuitive, but it helps keep your investment portfolio in the best shape to achieve your long-term goals.

2.       Avoid getting swept along with the market.

When the market is rising it is easy to be tempted to take more risk to increase your returns. The pain and uncertainty of a falling market can quickly be forgotten when shares are on an unbroken year-long rally – as they have been. But sticking to your guns and remembering your original goals and strategy are essential. Chopping and changing your approach when the market shifts can detract from returns rather than enhance them. Our investment philosophy is not influenced by the cyclical nature of the market; it evolves over time as the science of investing evolves.

3.       Guard your gains.

When money is tight, people tend to watch their expenses more closely than when they are feeling flush. In the same way, some investors can neglect to monitor their fees and transaction costs when markets are rising. Letting expenses slip is like trying to fill a bath with the plug out. This is why we keep portfolio expenses low in good and bad markets.

Sometimes the key to successful investing is simply to remain disciplined; to remember to stick to your well-considered decisions; and to keep your head when all around appear to be losing theirs. It’s as important to remember this simple philosophy when markets are rising as it is when they are falling.

The Chancellor’s reputation is staked on his deficit reduction plan, but he has little room to manoeuvre: the UK is teetering on the edge of a triple-dip recession; its coveted AAA rating is slipping away; and growth forecasts are endlessly slashed.

All of which sound like reasons to worry about investment returns, but is this really the time for investors to worry about the UK economy? Here are two reasons why not, despite the outcome of this year’s budget.

Firstly remember that, in an internationally diversified portfolio, the impact of any one country is reduced. UK-based investors are feeling the pain of the recovery in many ways, but if your portfolio is internationally diversified, you are exposed to other economies at different stages of their cycle.

Secondly, consider just how much (or little) influence any Chancellor actually has over market returns. Even though the post is one of the most influential finance ministers in the world, the decisions each incumbent makes in a short tenure at Number 11 might not make that much difference to an investor with a sensibly long-term investment horizon.

Clearly, tax and spending decisions have a huge impact on individuals, but with a long-term outlook, investors should put their faith in capitalism more than the Chancellor.

Investors can take a leaf out of Warren Buffett’s book. Whatever you think of the world’s best-known investor, you cannot knock his faith in capitalism.  He pointed out recently how strongly the odds are stacked in investors’ favour over the long-term; how short-term distress should not cloud long-term vision; and how futile it is to try to time entry and exit points in the market.  Sound familiar?

The stock market vs. the economy?

Furthermore, the stock market and economy do not always move in tandem. In 2011 American growth was a modest 1.7%, while the US stock market scraped a positive return. In contrast, China—the supposed engine room of global growth—returned (–22%) on the stock market, with robust economic growth of 9.3%.

Research has concluded that high levels of national debt can damage economic growth, but that low economic growth is not necessarily connected to poor stock market returns. In fact between 1971 and 2008 the average market return from high-growth countries was practically the same as from low-growth countries.

In the UK, the Budget might reveal some new information that alters the course of the economy or the consensus view, but the economy itself does not predict the direction of the market or returns from it.

The Budget remains a big event in the political calendar, but should do nothing to alter the course of your long-term investment strategy.

MFP Wealth Management had been short-listed for ‘Small Life and Pensions Firm of the Year‘ following applications from dozens of financial planning firms, so I was really pleased that we were ‘Commended‘ – in other words, we were awarded third place.

These awards recognise the profession’s most outstanding achievements in the world of pensions planning, so we were up against some much larger, long-standing firms with numerous advisers.  Being ‘Commended‘ by a panel of judges working with such a highly respected personal financial planning newspaper as the Financial Times is a real win for MFP Wealth Management.

Read more about the other awards we have been up for here.

A son of a friend just graduated from university. Still in his early 20s and with student loans to pay off, Rob has hardly any savings or capacity to save much at all.  So Rob and I met for coffee and a chat. He had acquired a taste for lattes while studying and working nights in London.

“How much do you spend on lattes each week?” I asked him. After thinking for a moment, he replied that he averaged about two cups a day, each costing £3. That equated to about £40 a week or £160 a month.

“Well, what if you sacrificed the coffee and put the cash into an investment plan instead?” I suggested. Rob looked doubtful. Kicking caffeine wouldn’t be easy. Besides, he couldn’t imagine that loose change spent on coffee would make much difference to his long-term financial position.

I dealt with this challenge by telling him about the miracle of compounding.

With an initial balance of £100, a monthly contribution of £160 and a yield of 5%, his coffee money would gradually accumulate to a pool of a quarter of a million pounds by the time of his retirement. And this was without saving another penny.

Assuming Rob’s salary was to rise on his graduation, he might bump up that monthly contribution to £500. In this case, his investment portfolio would grow to three quarters of a million by his retirement. And this was a conservative estimate.

This sounds too easy, he said. That’s because it is easy, I replied. The interest he earned on his investments was paid into his account and included in the next calculation. So he was earning interest on interest.

The key was that firstly, he was starting early. Secondly, he was saving a small amount consistently month after month. Thirdly, he was exercising patience. The rest of it was just the effect of time and compounding.

Rob now refers to his savings plan as his’ latte portfolio’. The initial pain of kicking his expensive caffeine habit was made up for by the slow roast of an investment portfolio that promised him a comfortable retirement.

Even for those of us much older than Rob, there are lessons here. We tend to underestimate the effect of gradual investing and patience in building wealth, just as we tend to over-rate gimmicks promoted in the media.

We can’t control the ups and downs of markets or the daily noise of the media. We can control our own behaviour. With slow and steady investing, and a trusted financial adviser to keep us disciplined, there is no reason we can’t succeed.

Now enough of this talk about money. If you would like a coffee and a second opinion about your investments, the coffee’s on me.  Get in touch at jk@mfpwealthmanagement.co.uk or call 01425 279212.