We have put together 7 tips that we think are useful for both experienced and novice investors. Kudos if you already know all 7!
So far, 2022 has not been a pleasant ride for most investors. Inflation, cost-of-living, war in Ukraine, an energy crisis, and more have meant that there hasn’t been much positive support for the market and most investors will have experienced some losses.
But it’s not only markets that are affected, our daily lives are too! With interest rates rising and things getting more expensive it can be difficult and sometimes confusing to know what the best thing to do with our money is.
While, markets aren’t always predictable, there is a long history to look back on which can help us in seeing how patterns, booms and busts can affect our investments. And, what it boils down to is that the longer you invest for, the better the outcomes can be:
So, our team (along with some data from Schroders) put together 7 tips to make the most of long-term investing, let us know what you think!
It’s always good to set expectations. Deciding to invest is a conscious decision to put money away with the aim that it can grow. Before you do put it away some key tips:
a. Know what you can afford to put away. This is money you don’t immediately need, and investing it will not take away from your immediate needs.
b. Pay off any expensive debt from credit cards, overdrafts or short-term loans as the percentage interest rate increases (sometimes called APR), will likely be more than the potential returns you can achieve from investing.
c. Pick a clear goal to work towards. If it is for retirement, a wedding, your children’s future. Understanding your own timeline is so important.
You will often see warnings on our site that investing carries the risk that you could end up with less than you started with. While that is true and we cannot guarantee positive returns, when we looked back at 148 years of data with Schroders, the longer you leave your investments, the lower the likelihood of losing money. The graph below shows the percentage chance of you losing money from 1 month to a 20-year period. Over 20 years the risk of losing money is 0.1% of the time.
Investing just £50 a month over a thirty-year period means your money can benefit from compound interest year-on-year (that’s interest on your interest!). The graph below shows what could potentially happen to a £50 per month investment vs a £50 monthly cash saving over 30-year period. And we haven't even got to the effect of inflation on cash yet...
While keeping your money in a bank account has no investment risk i.e. it usually means you won’t end up with less than you put in, inflation does erode the value of cash savings over time. This means the same £1 in a year’s time will buy you less than it does today. Although you cannot guarantee whether your investments will make or lose you money, inflation in the UK is almost a given, and the eroding power it has on cash is one of the most compelling reasons to consider investing in assets with the potential to return more than the rate of inflation.
Markets will fluctuate and global events beyond our control will happen, but the longer you invest for, the more time you have for your portfolio to take advantage of the good times and ride out the rough patches. One of the good things about the funds on The Big Exchange is that investment professionals are managing your fund, and they are the ones deciding when to trade the companies held within the fund for you and the other fund investors.
Taking the long view on future trends and investing today in the companies of tomorrow could pay off. If demand for new innovations, a more sustainable economy, and more sources of clean energy really grows, there could be more opportunity for the companies working in these industries to grow. It may not happen overnight, but if you believe this is the direction of travel, then you can invest in it too.
Investing doesn’t mean you have to have a load of cash sitting around to get started – it’s not poker and you don’t have to go all in. Little and often is no bad thing when it comes down to it. In fact, there’s a thing called pound cost averaging which is a strategy that involves “drip—feeding” your cash into investments at regular intervals over a period of time. Say you have worked out you can save £1200 this year, if you’re worried about taking some losses on your whole pot, you could split that out as £100 direct debit every month instead of investing it all at once.
The effect this has in the longer term is that it tends to even out volatile markets. Your investments are being made in both good and bad markets which means the prices you invest at could average out. A visual representation of this can be seen below using the last 12 months of data from the S&P500 (a index of the 500 biggest companies in America) as a guide:
Because the prices of the investments rose and fall, the lump sum investor experienced this all against the one price they bought in at in May 2021.
On the other hand, the regular investor bought in at different prices every month. This smooths out the effect of performance on the investor’s portfolio. Both investors lost money over one year, but the experience of each investor would have been very different because the regular investor reduced the impact of volatility. If you’re worried about investing in volatile markets, a regular investment might be worth looking into.
We hope these points have been helpful when thinking about your investments. We also understand that plans can change, sometimes overnight, and you may need to access your money sooner than planned. On our platform, as long as there are not extraordinary market conditions, you can sell your investments at current market value and get them back into your bank account within a week. There are no lock-in clauses or early exit fees. We know life can change and we’re here with you.
Please remember that when investing, making money is not guaranteed and your capital is at risk. The value of your fund can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.
The Big Exchange (TBF) Limited is a wholly-owned subsidiary of The Big Exchange Limited. The Big Exchange (TBF) Limited is an Appointed Representative of Resolution Compliance Limited, which is authorised and regulated by the Financial Conduct Authority (FRN 574048). (7019)