The 2008 crash marked a turning point in the financial world. Established banks collapsed, global stock markets fell dramatically, and many people lost their money. There’s no denying it, what happened in 2008 eroded public trust in financial institutions and gave a negative slant to investing. Fast forward to today and people’s attitude towards investing is still influenced by the Global Financial Crisis. According to our own research, 62% of Brits aren’t currently investing, and only 2% of the people surveyed hold a Stocks and Shares ISA2. Needless to say, the 2008 financial crisis is still present in people’s mind! As the global stock market crash undeniably showed, investing does come with risk, but it’s a much-misunderstood thing and there are ways to mitigate it.
How risky is investing?
When you invest in the stock market, 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 get back less than you initially invested. But because your returns aren’t dependent on a fixed interest rate, like they would be if you were saving cash in a savings account, there’s also a chance you could end up with higher returns. In fact, over the long-term, stocks tend to outperform cash. A 2015 Barclays study found that over any 10-year period in the past 115 years, shares have performed better than cash 90% of the time2.
Investing only tends to hit the front pages when there are big losses or market crashes and as a result, it is often associated with money loss in people’s minds. With investing, there’ll always be some risk, that’s for sure. However, we take risks every single day, whether it’s crossing the road or driving to work, we’re unconsciously putting ourselves in risky situations, and we don’t really seem bothered by it. This is because we’ve learnt to manage these risks by adopting specific behaviours and we’ve got confidence in what we do. Obliviously, looking before crossing or respecting speed limits are good ways to reduce risks on the road. Well, it’s the same with investing! You can take steps to limit the amount of risk you take.
Put your eggs in different baskets
As an investor, you typically buy things (e.g. shares, bonds, property, and commodities) at a certain price and hope the price of what you bought will go up over time, so you can make a positive return. The key to mitigating risk is to buy a large number of these things, rather than a few. Let’s say you buy shares from Company A. The performance of your investments will very much be dependent on how well Company A is doing. If things get rocky for the company, the value of your investments will likely drop. Now, let’s imagine you invest in many different companies, your returns will be based on how well the shares of these companies are performing collectively, and poorly performing investments would be balanced out by others that are doing well. This strategy is called diversification and it can be taken even further. Not only can you spread your money across different companies, you can also buy lots of types of investments and invest in different global stock markets (e.g. the UK’s FTSE 100 and the S&P 500).
A good effortless way to diversify your portfolio is to buy investment funds. Think of them as hampers full of tasty investments. Some will follow specific markets, like the FTSE 100. Buying these funds, also known as passive investment funds or tracker funds, is similar to buying shares in every company present in one particular market, except it’s a lot easier and cheaper.
Focus over the long-term
In addition to diversifying your portfolio, it’s important to stick with your investments for a number of years. Over the short-term, financial markets have ups and downs and you can expect to see the value of your investments fluctuate. Although stressful, market bumps are part and parcel of being an investor and one way to deal with them is to do nothing. A bit counterintuitive, isn’t it? But, if you react to market storms and sell your investments every time there’s a drop, you will likely make your losses real and you might miss the potential rebound of the market. Remaining invested regardless of market movements may come with many benefits. It gives your money more time to grow and compound, and it can help you smooth out market bumps. What’s more, evidence shows that long-term investing increases the chance of making a positive return. People who’ve remained invested for any 10-year period in the FTSE 100 index between 1986 and 2019 have had an 87% chance of making a gain3.
With robo-investing platforms, like Wealthify, investing is as risky as you want it to be. Digital investment management services are equipped with slick tools that let you choose the risk level that suits you. At Wealthify, you can be Cautious, Adventurous, or somewhere in between. If you opt for a Cautious Plan, you’ll typically be invested in investments considered lower risk, such as government and corporate bonds. If you choose to go on the other end of the spectrum and invest with an Adventurous style, your Investment Plan will contain a higher percentage of high-risk investments such as shares.
Once you’ve chosen your risk level, our investment experts do the hard work for you. They create a diversified portfolio, then monitor the markets to ensure your money maintains a good healthy mix of different investments.
1: *Wealthify ISA survey. Research conducted by Opinium Research between 9-12 March 2018 amongst 2,010 consumers.
2: Barclays Equity-Gilt Study: Source Telegraph: https://www.telegraph.co.uk/finance/personalfinance/investing/11477122/Historys-lesson-for-Isa-investors-Barclays-Equity-Gilt-Study-2015.html
3: Based on calculation undertaken by our internal team based on Bloomberg data
Please remember the value of your investments can go down as well as up, and you could get back less than invested.