At a time when savings book returns are lower than inflation, it would be a shame to leave your savings dormant. Do you want to make a profitable investment? Many options and many actors are available to you. Since it is difficult to choose and develop an effective investment strategy, here are 5 steps to follow that will guarantee you to invest well .
1. Ask yourself the question of your investment objective
Before knowing “what to invest in”, you have to ask yourself the question of “why invest?”. This means that it is not necessarily the most efficient, because it is too risky. It all depends on your objective and its investment horizon. Indeed, financial assets and in particular equities go up and down cyclically, but over the long term the trend is upward. So :
If you invest in the short term (less than 5 years), for example with the aim of buying an apartment, your risk taking must be contained. Choosing a risky investment exposes you to downside fluctuations and could lead to losses when you need your money.
If you are investing to prepare for your retirement in 20 years, you can afford to take risks, since a fall in stock market prices during this period will be compensated by a further rise.
Properly determining your objective and your investment horizon allows you to optimize your risk-taking.
2. Invest with the right tax envelope
The investments you are going to make, whether in individual stocks or in investment funds, must be housed in an account. We talk about a tax envelope, because depending on the type of “account” chosen, taxation will be different.
There are three major tax envelopes in France in which you can make financial investments: the securities account, the equity savings plan (PEA) and life insurance.
A securities account is an account that allows you to hold shares, bonds, investment funds but also more speculative derivatives such as warrants, turbos and options. The securities account is mainly dedicated to informed speculators and investors wishing to make purchases/sales of securities on a regular basis.
However, this envelope does not present any tax advantage: you will be taxed on the dividends of the shares held and on the capital gains realized at each transfer of title, at the single flat-rate deduction (30%, social charges included) or according to the scale of the income tax if you opt for this option.
3. The equity savings plan (PEA)
The PEA is a tax envelope allowing investment in European equities or investment funds themselves invested in European equities at more than 75%. It offers advantageous taxation: 5 years after opening the account, all your earnings are tax exempt. Note, however, that social charges are always deducted, upon withdrawal, up to 17.2% on dividends and capital gains realized.
However, this tax envelope has its share of constraints, in addition to the impossibility of opting for assets other than European shares, any withdrawal before 5 years results in the closure of the account. Finally, the PEA is capped at 225,000 euros.
Life insurance is the most popular tax envelope in France. It allows you to invest in shares, investment funds and structured products as well as in the fund in euros whose capital is guaranteed. Life insurance has an advantageous tax regime at two levels:
Plus, life insurance has no cap and you can make withdrawals and deposits whenever you want.
In most cases, life insurance will be the most suitable tax envelope, due to its tax system, the diversity of investment vehicles that are eligible for it, and its flexibility. In order to help you choose, you can consult this article on the different tax envelopes (securities account, PEA, life insurance) .
4. Calibrate the risk taking of your investments
As we have mentioned, investment in shares of listed companies is subject to downward and upward fluctuations. However, there is an upward trend driven by corporate wealth creation, innovation and general economic growth. This tendency means that the risk of observing a loss decreases with the duration of the investment.
An analysis of historical data shows that for a diversified investment, the risk of loss is about 30% over a period of 1 year, over a period of 10 years it drops to 10%, finally the risk disappears completely over a period of 15 and over. A diversified portfolio has never caused losses over a period of 15 years, even having invested in the worst of times (crash of 1987, internet bubble in 2000, etc.).
Your exposure to the equity market must therefore be adapted to your investment horizon. In the short term, preference should be given to bond assets, which are less volatile, and funds in euros with guaranteed capital.
5. Diversify your investment
What is true above is only valid for a properly diversified portfolio. This is one of the fundamental rules in finance: diversifying your investments, or, as the saying goes, not putting all your eggs in one basket. This principle makes it possible to limit the risks linked to the volatility of the assets and to completely eliminate the risk of bankruptcy.
Thus, if the automaker market does poorly in Asia, its poor performance could be offset by investment in the luxury sector in Europe.
In order to simplify your life and to avoid having to select individual shares yourself, it is better to choose investment funds, or better, ETFs (Exchange traded Funds), also called trackers or listed index funds. ETFs are an interesting solution because in addition to allowing great diversification, they incur very few costs .
6. Do not panic if you see that your capital is falling
If you’ve followed the first four steps correctly, you don’t have to worry about short-term ups and downs. As an investor, you will have to learn to control your emotions and not be influenced by your cognitive biases . There will be times when your investment will turn negative, but that shouldn’t worry you.
Nalo is an investment company dedicated to individuals. Thanks to our project-based investment approach, we offer you tailor-made, diversified investments, calibrated according to your projects and your financial situation. In order to optimize your taxation, you can subscribe to a life insurance contract, directly on our site.
Furthermore, Nalo has chosen to invest only in ETFs, thus guaranteeing its clients the most attractive fees on the market.