Choosing to start investing is a big decision, and it’s not one to be taken lightly. After all, with investing your capital is at risk, which means you might get back less than you put in. You may weigh it up and, as a first-time investor with no experience, you may have talked yourself out of it. And, to be honest, if you’re that averse to risk, this may be the right move for you.
But if you do your research, understand a bit more about investing, get your finances in order, learn more about investing – or, alternatively, use a provider like Wealthify - you could benefit from the potential of investing. However, if you just jump straight into investing then these are some of the dangerous moves you’re likely to make:
Investing your life savings
Savings are important, and it’s good to have an emergency pot to fall back on. We say it over and over again - when investing your capital is at risk. This means that you could get back less than you put in. So, it may not be wise to invest every last penny you own. Instead, it’s a good idea to have a few months’ worth of outgoings saved up before thinking about investing. This way if anything goes wrong, say you lose your job, or your car breaks down, you know that there is a certain amount of money readily available.
Only investing in one thing
Sometimes a particular type of investment gets a lot of hype. Often these bring new investors to the market. But unfortunately, they’re only interested in one thing, and as a result, don’t diversify their portfolio. And diversifying is as simple as just spreading your money across a few different investment types. Essentially, not putting all your eggs in one basket. Nothing highlights the dangers of not diversifying like the bitcoin boom.
In 2016-17 the bitcoin hype was huge, so thousands of people purchased it. And for a while, this looked like a great option. The price rose from $998.33 on 1st January 2017 to an astronomical $20,089.00 on 17th December 20171. But then the bubble popped. Prices plummeted and in two months bitcoin lost more than half its peak value and continued to fall until early 2019. A quick google will show you hundreds of news stories of people who lost millions when bitcoin crashed. While the impact of this would have been significant to most portfolios, putting all your eggs in one basket makes it much worse. If you're interested in finding out why we don't invest in cryptocurrencies like bitcoin, check out this blog.
Ignoring Stocks and Shares ISAs
If you’re still thinking of investing but haven’t considered a Stocks and Shares ISA, then it could be worth looking into. A Stocks and Shares ISA is a little treat from the government, giving you an annual allowance for tax-efficient investments. Currently, you’re able to invest up to £20,000 each tax year and not pay income tax or capital gains on any profits you make. This means that, if you reinvest your gains, you could build up your portfolio quicker than if you were being taxed on this amount. Less to the government, more to your investments – what’s not to love?
Not in it for the long run
Investing isn’t a fling; it’s a long-term relationship. And for a relationship to work, you need to stick at it, even when times are rough. With investing, your money will rise and fall, and while some of the falls can seem scary, that’s when you need to stick at it. For example, if you’d invested in the FTSE 100 for any 10 years between 1984 and December 2019, there was an 89% chance you’d have made a positive return2.
And then there’s the phenomenon of compounding. This is when gains, or dividends, made on your investments are reinvested, providing more potential to make further gains. Over time, these dividends could really start to build up and snowball. So, a long-term investment strategy is important.
Pulling out when times are bad
This is a mistake that lots of first-time investors are likely to make because it’s almost intuitive. When the price of your investments starts to fall, you get rid of them, right? Maybe not, as doing this makes your loses real. For example, say you invested £1,000, but after six months, your investment drops to £800. At this point, you haven’t lost anything because you would still own the same shares. Maybe the market is in a lull. If you withdraw now, you’ll have made a £200 loss. But if you stay invested, there’s every chance that the market could pick back up and your investments could potentially exceed your initial £1,000.
Trying to go it alone
To invest well requires research, time and understanding. Lots of it. Investing can quickly become a full-time job, monitoring the markets multiple times a day, checking up on world politics, news and cultural movements that could have an impact. This can quickly become overwhelming, and if you haven’t got the time to research, then it could harm your investments. Luckily, there is a solution – using a robo-investor, like Wealthify. With a team of experts managing your investments, you don’t have to worry about the research, buying and selling, as we do it all for you. In fact, the only thing you need to do is tell us how much risk you want to take and the amount of money you want to put in.
1 – data from https://coinmarketcap.com/currencies/bitcoin/
2 – data from Bloomberg
Your tax treatment will depend on your individual circumstances and it may be subject to change in the future.
With investing, your capital is at risk, so the value of your investments can go down as well as up, which means you could get back less than you initially invested.