Investing is a great way to give your money a chance to grow, and yet, few people do it. Our own research found that almost two-thirds of Brits aren’t currently investing and only 2% of the population hold a Stocks and Shares ISA1. So why are so many people reluctant to give investing a go? Reasons vary, but most people tend to avoid the investing arena because they’re afraid to lose money. Whilst this is a legitimate fear, it could well be inflated by the constant media craze surrounding every stock market drop. Look at the news, financial markets only tend to hit the front pages when they fall, so it’s not surprising to see people scared of investing. But let’s get this straight. Losing all your money in the stock market isn’t impossible, but there are ways to help prevent such a catastrophic scenario.
So, what are the risks in the stock market?
When you invest, your returns aren’t guaranteed and depend on how much your investments are worth when you sell them. As a result, there’s a risk you could lose money, but this also means you could make some returns. Whilst you can’t control how well your investments are performing, every decision you make as an investor will influence your investment journey and have some impact on the conclusion of your adventure. For instance, when markets are going down, many people panic and sell their investments in the hope of avoiding further potential losses. But by doing so, all they’re doing is making their losses real. Alternatively, some investors choose to keep calm and remain invested regardless of the market movements. That way, they avoid making their losses real and might even benefit from a potential bounce from the market. So, if you don’t want to lose all your money, it’s important to adopt strategies that will help you mitigate risk.
How can you mitigate risk when you invest?
Financial markets are like roller coasters: they go up and down. There’s no denying it, seeing your investments go down in value can be scary, but try not to act on an impulse when this happens. Think about it, the value of your investments might be down, but for now, it’s only an alarming figure on your dashboard, it’s definitely nerve-wracking, but you’ll only lose money if you sell when the share price is lower than what you originally bought it for. By holding out and waiting for the markets to bounce back, your investments could flourish, and you’ll be thankful that you waited and held your nerve. So, when markets are dropping, try to refrain from panic selling and stick with your investments over the long-term. Remaining invested for a number of years has many advantages. Not only does it give your money more time to flourish, it’s also a good way to ride out the bumps.
Spread out your money
Another way to mitigate risk and minimise losses is to diversify your investment plan by spreading out your money across different investment types, and regions. That way, poor performing investments are likely to be balanced out by others doing well. If you don’t diversify and instead, invest all your money in one or two companies, you could be in for a nasty shock if they were to struggle. So, make sure your investment plan is well balanced and contains a good mix of investments from around the world. An easy way to diversify is to buy investment funds. What are those, you ask? They’re like hampers containing tasty investments. Some of them are built to track and mimic the movements of specific financial markets, such as the FTSE 100 or the S&P 500 – these funds are commonly described as being ‘passive’. If you decide to buy a passive fund following a particular market, your money will typically be invested in every company in that market and your returns will depend on how well the shares of these companies are performing collectively. This is effortless diversification for you! If you’re not confident enough to choose your own funds, there are many digital investing platforms that’ll do the hard work for you.
At Wealthify, our team of experts will build you a diversified portfolio with the right mix of funds. They’ll also actively monitor how markets behave and adjust your Plan if they see an opportunity to take advantage of the best of times as well as making changes to help shelter your investments when things aren’t as rosy.
1: Wealthify ISA survey. Research conducted by Opinium Research between 9– 12 March 2018 amongst 2,010 consumers
Please remember the value of your investments can go down as well as up, and you could get back less than invested.