Are you overwhelmed by the idea of investing in the stock market? Put off by the prospect of having to keep up with the markets and decide when to buy and sell? Frightened you could lose everything? Many people are scared of investing, but it can be much simpler than you think. Carl Turner explains why.
The majority of investors have similar basic goals: set aside enough to retire comfortably, save a deposit for a house, fund a child’s education. Investment is essential to achieving these goals and you’re certainly going to need a better rate of return than you’ll get by keeping your money in the bank. Yet many people stick to savings accounts and cash ISAs because of a fear of investing.
But I have good news: you can adopt a very simple strategy to investing which will build your wealth and achieve those goals. There are a few golden rules you need to bear in mind, including one big no-no, which might surprise you.
The golden rules of investing
1. Take a long-term approach
For most investors a buy and hold strategy over a long timeframe is the most effective way to achieve their financial planning goals.
2. Know how much risk you can take
This will depend on three main factors: your personal tolerance level, the timeframe you plan to invest over and the amount of risk you need to take to succeed. A financial adviser can help calculate this more accurately using risk-modelling software.
Asset allocation is critical. Select a portfolio which is diversified across different asset classes and with the equity component, is also split between companies, industries and regions. This may sound tricky, but it doesn’t need to be. I work with a wealth management partner, who have a great choice of ready diversified funds to suit all levels of risk.
4. Review performance periodically
Of course, it is important to keep track of how your investments are performing. I recommend reviews at least once a year and always after major life events such as marriage, divorce or the birth of a child.
5. Do not try to time the markets
One thing you should avoid is monitoring the value of your investments daily and getting spooked by attention-grabbing headlines in the media which might lead to knee-jerk reactions. Markets move in cycles and while the bull markets will make you feel good, the bears most definitely won’t. However, that’s no reason to sell out and here’s why….
Even seasoned investors have trouble forecasting market movements. At any time, a Google search on what will happen to the markets will reveal someone predicting an imminent crash while another foresees a speedy market recovery and record-breaking highs. External factors which cannot be predicted are always arising. Covid-19 is the perfect example.
The dangers of timing the markets
If trying to make accurate market predictions is futile then it follows that trying to buy and sell stocks at exactly the right time is a terrible way to manage your investments and grow your wealth. If you ever feel tempted to stray into speculation territory, be aware that mistiming the markets can have a seriously damaging impact on your returns. You may well end up selling precisely when prices are at their lowest but, perhaps more importantly, you risk missing out on the bounce back that frequently follows a slump.
If share prices tumble, it is human nature to feel that you are best off getting out of the markets for a while, but that can cost you dearly. Clever people have crunched numbers to prove it!
Here are some interesting statistics to back up the ‘no need to time the markets’ theory from JPMorgan. Let’s say you invested $10,000 into the S&P500 on 3rd January 2000 and you didn’t touch the investment until 31st December 2019. This timeframe represents a period of roughly 5000 trading days. At the end of the two decades your investment would have grown to $32,421, producing an average annual return of just over 6%.
Now imagine you bought and sold within that timeframe, trying to time the markets. As a result, you missed the top 10 trading days. Only 10, but the impact on your return is striking. Instead of $31,421 you only have $16,180. A return of just 2.44%, compared to the tidy 6% you got by staying invested.
And the more days you miss, the more significant the negative impact on your return. Check out the table:
The above shows that the best strategy is not complicated. Buy and hold over the long term is a stress-free way to manage your financial planning and attain the results that you need.
Your chances of success and your peace of mind will be greatly improved if you have a professional financial adviser on board to help you with the trickier parts of managing your portfolio such as clarifying your tolerance to risk and selecting suitably diversified investments.
Contact me today and let me help you take your first steps into the wonderful world of investing with confidence.
Senior Financial Consultant- Highly Commended Emerging Talent of The Year (International Investment Awards 2019)
I aim to maintain and grow an excellent relationship with each client which lasts throughout their working lives and beyond. I strongly believe that a good financial adviser can make a significant difference to an individual’s financial success and positively impact their lives, which is why I love doing what I do.