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New to investing?

Before investing, it’s important to understand what your outcomes and end goal is.

| 4 min read

For some of us, the thought of parting with our hard-earned savings and investing it in the stock market can be daunting. A lack of investment knowledge is one of the key factors why many try and play it safe by sticking with cash savings. However, with interest rates particularly low at present, it could prove costly in the long run.

According to Charles Stanley’s research, as a result of COVID 19, approximately 26% of survey respondent have increased the amount they save and around a quarter of UK adults are keen to invest but have not tried. One of the biggest barriers is ‘jargon’ which is putting people off. But ‘Cash’ isn’t always ‘King’. Long-term market studies have calculated that shares typically beat cash around 70% of the time over a two-year period and if you extend the holding period to 10 years your chance of beating cash rises to over 90%.

This is particularly stark in today’s environment where savings interest rates are near record lows, while yields on equities are near record highs which means that in the last twelve months savers missed out on some £38bn of income (source: Janus Henderson) – this means we are unwittingly letting our savings fall into an Investment Gap equivalent to £1,350 for every household.

By keeping too much in cash, investors could be at risk of not making the most of their money – or not achieving their financial goals.

Did you know?

According to Charles Stanley’s research, 1 in 14 (7%) of survey respondents have used the impact of Covid-19 as an opportunity to encourage friends and family to start investing.

The barriers to investing – it all boils down to the 4 C’s

Concerns over Risk v Reward

Performance is a key factor. Two in five (40%) of our survey respondents said they were concerned about market volatility and felt investing was just too risky.

Choice

14% of our survey respondents admitted they were overwhelmed and didn’t understand how to invest and thought it was too difficult, and the same number said they thought it would be too time-consuming.

Complexity

A fifth (20%) of our survey respondents said they found keeping on top of the data too challenging.

Communication

Not speaking my language. Off-putting financial jargon is probably the biggest barrier of all. Well over half (55%) of the people we questioned in our survey weren’t confident they understood financial terms, and this was particularly true among women. 45% of men said they felt confident versus only 37% of women.

In light of the above, it’s not surprising to see that just 7% of survey respondents understand or have even heard of Robo Investing, a space that is on the rise. However, financial terms such as ISAs, Inflation and interest rates carried the highest understanding.

Volatility is an inevitable part of investing, and it can be very scary when the markets fall, but it is a necessary evil and investors must always be prepared to ride the ups and downs. It’s often the case that the market falls more quickly than it rises, which is psychologically challenging.

A common mistake is to sell when that happens due to fear which can be the worst thing to do. Large falls can be followed by large rises, so you could risk losing on both sides. In the absence of a crystal ball, ‘keeping invested’ is often the best strategy, no matter how uncomfortable.

Daily monitoring during a falling market can result in an over-emotional reaction and make rational decisions difficult. Having a well-diversified portfolio helps so you don’t put all your eggs in one basket, and you can spread the risk.

One way to counter market ups and downs, as well as taking some of the stress out of investing, is to contribute money at regular intervals rather than a lump sum. The advantage is that market timing is not a concern.

Before investing, it’s important to understand what your outcomes and end goal is – first home, school fees or boosting retirement income? Finally, you should prioritise paying off any debts and ensure you have a ‘rainy day’ cash fund to cover 3-6 months’ worth of bills.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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The information in this article is based on our understanding of UK Legislation, Taxation and HMRC guidance, all of which are subject to change. The tax treatment of pensions depends on individual circumstances and is subject to change in future. This article is solely for information purposes and does not constitute advice or a personal recommendation.

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