Ask anyone why they don’t invest, and they’ll either tell you they don’t have enough money to take the plunge, or they’ll confess they’re too afraid to join the investing world. If you fall into the latter category, you’re definitely not alone! The Global Financial Crisis in 2008 gave investing a bad name and exacerbated fears. Fast-forward to today, and most people continue to associate investing with market crashes and money loss. Investing can be scary, there’s no denying it, but letting fear dictate your decisions could harm your financial future over the long-term.
Why is investing scary?
Investing is scary because returns aren’t guaranteed. Instead, they depend on how well your investments are doing and how much they’re worth when you sell them. As a result, there’s a risk you could get back less than you originally invested. There’s also a potential for tasty positive returns, but this possibility is often overlooked. And there’s a good reason for this: we are loss averse. In other words, we prefer to avoid losing something we possess, rather than take a risk in the hope to make a big win. We hate losing more than we like winning, and therefore, we tend to ‘play it safe’ when it comes to our finances. For instance, Brits are more likely to save than invest. In fact, most of them don’t invest at all, according to our own research, 62% of Brits aren’t currently investing and only 2% of Brits have their money invested in a Stocks and Shares ISA1.
Fear is keeping people outside the investment world and potentially away from reaching their long-term financial goals. Instead of investing, people prefer to tuck away their money in savings accounts and Cash ISAs. Whilst saving is a sensible thing to do, it’s not always the most suitable option if you’re looking for long-term growth. The value of your savings could drop if the interest rate you receive falls below inflation. This is why it’s important to think about investing. Since your returns aren’t tied to any fixed interest rate, there’s a chance you could get inflation-beating returns. In fact, in the long run, stocks tend to perform better than cash. A Barclays study found that stocks kept over any 10-year period since 1899 have had a 91% chance of outperforming cash2. But what about the risk of losing money, you ask? There’s no denying it, putting money in the stock market does come with risk, but it’s often a misunderstood concept.
How risky is it to invest in stocks and shares?
Embarking on an investing adventure involves some risk, but it doesn’t have to be a reckless journey. There are ways to help you manage your investment risk.
Spreading your money across many different investment types and regions could help you mitigate risk. Investing all your money in just one market or one company typically comes with higher risk as your returns depend on the performance of a few investments. Make the wrong call and you could be losing a lot of money. A good way to protect your investment plan against market storms is to invest in lots of companies and markets. That way, poorly performing investments will likely be balanced out by others doing well.
Another way to mitigate risk is to remain invested over the long-term. If you’re currently investing, you’ll probably know that markets have bad days. And when times get stormy, it’s often tempting, as an investor, to sell any investments that are going down in value. But, if you react on an impulse and sell every time things get rocky, you will likely make your losses real and you might even miss the potential rebound of the market.
Seeing the value of your investments drop is nerve-wracking, but it’s important to stay calm and think long-term. If you remain invested, your potential ‘loss’ is simply a negative number on a screen and this alarming figure could go the opposite direction once the storm is over and the sun comes back. So, keep your nerve and commit long-term. Not only can it help you ride out market bumps, it’ll give your money more time to flourish.
With robo-investing platforms, like Wealthify, you can choose the risk level that suits you. At Wealthify, for example, you can be Cautious, Adventurous, or somewhere in between. Based on your choice and other factors, our investment team will build you a diversified portfolio with the right mix of investments. If you opt for a Cautious Plan, more of your money will typically be invested in lower-risk investments, such as government and corporate bonds. Alternatively, if you’re choosing the adventurous side of the spectrum, your Plan will contain a greater percentage of higher-risk investments, such as shares and property. Once your Plan is built, our team of experts will monitor how markets behave and adjust your Plan to keep it on track with your investment style.
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.