There’s no denying it, Brits are far behind the lead when it comes to investing their money. According to our own research, 62% of Brits aren’t currently investing and only 2% of those who took part in our survey are paying into a Stocks & Shares ISA*. So, what’s putting people off the investing world? One fear many people share is risk. Investing does come with risk but it’s a much-misunderstood thing, so here are some things to know.
How risky is a Stocks & Shares ISA?
Being invested isn’t without risk since returns aren’t guaranteed. With a Cash ISA or a traditional savings account, you typically receive a fixed and regular interest, however with a Stocks & Shares ISA, there’s no such security. Your returns depend on how well your investments are doing and how much they’re worth when you sell them, as a result, you could get less than you initially invested. On the other hand, your returns are not limited to a fixed rate of interest, so there’s also a chance you could get inflation-beating returns over the long-term. Evidence suggests that investments tend to outperform cash in the long run. According to a Barclays study, over any 10-year period in the past 115 years, shares have performed better than cash 90% of the time1.
1: 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
How can I mitigate risk?
The thing with investing is, there’ll always be some risk, but it’s not necessarily a reason to turn your back on it. Think about it, we take risks every single day. For example, when you’re crossing the road, you’re taking some risk, but you’re still doing it, otherwise you’d get nowhere. The key is to manage your risk. You do this by looking right and left before you cross to make sure the road is clear. It’s the same with investing! You can take steps to limit the amount of risk you take through the way you invest and the investments you buy.
Avoid putting all your eggs in the same basket
A good way to spread your risk is to diversify. What does that mean? It simply means buying lots of types of investments (e.g. shares, bonds, commodities, and property) and investing in different stock markets (e.g. the UK’s FTSE 100, the US’s S&P 500, and Japan’s Nikkei 225). That way, you’re less likely to lose everything since poorly-performing investments can be balanced out by others that are doing well. If it sounds like too much hard work, don’t worry there are services that can do it for you.
Commit for the long-term
Over the short-term, you should be prepared to see the value of your investments decrease – this is part and parcel of being an investor and it’s important to be comfortable with it. Financial markets are like roller coasters- they go up and down. One way to shelter yourself from these unpredictable movements is to stick with your investments over the long-term. Not only does it give your money more time to potentially grow, it can also help you smooth out market bumps. For instance, people who’ve been investing for any 10-year period in the FTSE100 index since 1986 have an 87% chance of making a gain2.
2: Based on calculation undertaken by our internal team based on Bloomberg data
*Wealthify ISA survey. Research conducted by Opinium Research between 9– 12 March 2018 amongst 2,010 consumers
The tax treatment depends on your individual circumstances and maybe subject to change in the future.
Please remember the value of your investments can go down as well as up, and you could get back less than invested.
Investing is for everyone.
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The comments and opinions expressed in this article are the author's own and should not be taken as financial advice from Wealthify.