Demystifying the spooky terminology of investing at Halloween.
Nightmare on Wall Street
Clowns, Werewolves,...the scales after tucking into the kids’ trick or treat haul; there are many things to be scared of this Halloween but investing should not be one of them.
Fear should not keep you out of the stock-market, indeed you should be more afraid about the buying power of your money being eroded by inflation over time.
Many are afraid to invest in the stock market, conflating investing with gambling. While both involve risking hard earned cash in the hopes of making a profit, one should bear in mind that when you invest in equities you own a share of the company you have purchased and, dependant on the stock, you may also earn a dividend rewarding you for your risk. When you gamble you own nothing.
Here are 5 steps to help overcome your investment fears.
Step 1: Educate yourself
A classic case of fear of the unknown, of course investing will appear scary if you don’t know much about it.
We've got lots of tools available with the retail investor in mind. However, if you still find the idea of investing daunting there are products available to help. Index Tracker funds are a low cost option and can make a solid core for a portfolio by simply replicating the performance of a benchmark index. While these passive investments will not beat the index, the risk of underperforming is greatly reduced. Alternatively, you may prefer to have a fund manager do the work for you, actively managed funds have the potential to outperform trackers but there is also a greater risk to underperform the index. Investors should be aware that the annual management fee of an active fund will be higher than a passive product.
Step 2: Diversification
Minimise your risk of losses by ensuring all your eggs are not in one basket. True diversification alongside a long term investing horizon sees risk greatly reduced and is the best defence against a volatile market. Diversification does not simply mean investing in a large number of companies and ideally you should have a mix of asset classes such as equities, bonds, cash or commodities. Bonds generally favour low or falling growth cycles while equities generally favour strong economic growth. This lack of correlation between asset classes means that when shares fall, bonds often rise and vice versa, thus reducing your exposure to losses. A combination of different sectors and geographical regions will further spread your risk.
Step 3: Little and often
Putting a large amount of money on the line can be scary. Investing a large lump sum on one day can expose you to the higher risk of buying when the market is peaking, whereas purchasing investments little and often can reduce the average price per share paid. A great idea is to get in the habit of making investing a standard feature of your monthly outgoings via direct debit. How many of us have a monthly gym membership we pay for but never use?! The power of compounding (earning interest on interest) on even a small monthly amount can have a huge impact on your overall portfolio value.
Step 4: Identify your goal
Different goals require different strategies; for example, are you saving for your first house or retirement? Do you wish to simply preserve the value of your investment, generate income, grow your capital, or both? It is also important to consider your investment timeline. If your goal is to withdraw your cash in a year, investing is very risky and your money may be best placed in a savings account. The longer your investment timeline the longer you have to ride out the rise and falls of the market and maximise profits.
Step 5: Identify your risk profile
Are you someone who enjoys being frightened by a scary movie or would you be more comfortable with a less risky rom-com? A risk profile determines how much investment loss you can stand and should consider your investment goals and age. It is important to re-evaluate your risk profile annually reviewing whether the purpose of your original investment and time horizon is still the same? If your portfolio is not in line with your current situation you risk the possibility of being vulnerable to more losses than you are comfortable with. If you are a more cautious investor, you will want to preserve your investment rather than risk losses, a moderate investor will be interested in both capital preservation and growth, and a more aggressive investor will typically have a longer time line. Risk and reward generally go hand in hand in investing with low risk approaches as a rule resulting in lower returns than high risk strategies.
So be brave this Halloween, follow these steps and your portfolio should not keep you up at night.
All information given including prices, yields and our opinion is correct at the time of publication. Our opinions on investments can change at any time and for our latest view please go to www.share.com. To understand how our Investment research team arrive at their views please read our Investment Research Policy.