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Ask Justin

Ask Justin

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How do I make money from investing?

Investment | ISAs Helpful? 2

Asked by ajehollis, submitted 29 January 2012.

Open Quote I don't understand how to manage a Sipp or Stocks and shares ISA.

Am I supposed to crystallise any gains by sellling my chosen funds when they peak, and buy them back when they slump. Or am I just supposed to hold out for the long term and see where they stand then?

What I don't really understand is how they make money.

For example Aberdeen Emerging Markets swings up and down frequently, and sometimes it is 15 per cent up, sometimes 15 per cent down. How does the fund make any money year upon year?

Am I just supposed to hang on till i retire in the hope that they will be at some high percentage, or am I supposed to be dealing them to try to get more for cheaper?
End Quote

Answered by Justin on 06 September 2012

The dream for any investor is to buy at the bottom of the market and sell at the top. Then wait for markets to fall and do it all over again.

But in practice its nigh on impossible to be right all the time - just ask the majority of professional investment managers who fail to beat tracker funds.

So in very simple terms there are two ways to consider investing. One is to try the above (or at least sell at a higher price than you paid) and hope you're right more often than you're wrong. Or you can just invest and trust that over 10-20 years you'll do ok (i.e. markets will do well overall despite a bumpy ride along the way). In practice most of us are probably somewhere between the two.

You're right about the Aberdeen Emerging Markets fund - over the last year it's been very volatile and made little money overall (4.8% at the time of writing). But over the last 3 years its returned 48% in total, rising to 74% over 5 years. So had you invested five years ago and sat tight you'll have made a very tidy profit.

Of course, that's not to say the fund will make as much money over the next 5 years - it might even lose money. The point is, no-one knows, investing is a gamble. The key is to try and keep risk at a level you're comfortable with and, with a bit of common sense, you'll hopefully do a fair bit better than leaving your cash in bank over 10-20 years.

Please note this answer does not constitute a recommendation or financial advice and should not be relied upon when making specific investment or other financial decisions. You should always undertake your own research into whether a product or service is appropriate for your needs and, if necessary, use a qualified professional adviser.

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