Tips to stay more level than your funds
Rollercoasters, love affairs, family games of Trivial Pursuit … there are plenty of ways to get the blood boiling and the emotions pumping. But investing – no. It pays to stay calm.
First, a quick reminder of the main difference between saving and investing and, basically, one is safe, the other carries risk.
Saving is stashing your money so it’ll be there when you need it. Any interest your savings make will be slow, steady, and largely an afterthought. For example, bank £5,000 at 5% interest and you’ll have a cool £5,575 after two years. It’s not huge.
Investing, on the other hand, is 100% about growing your pot. The rewards can be much bigger but, correspondingly, so is the risk.
Invest £5,000 in a high risk fund and favourable market conditions could swell your pot to £7,710 by year two*. Awesome, but poor market conditions could shrink your pot to £3,280 by year two*. Risk cuts both ways.
Staying level
A key rule in investing is to manage emotional impulses. Yes, it’s uncomfortable when your investments take a dive, but selling out there and then only guarantees you’ll lose money.
So it pays to detach, emotionally speaking. Investments fare better over time but volatility is part of the deal. The market boils and simmers – it’s what it does. It’s key to stay calm.
Too many react too quickly when spikes and slumps hit their portfolio, or the market generally. Even seasoned investors get seduced into buying too high and / or selling too low when the (social) media hype machine does its thing and emotions run wild.
“Successful investing takes time, discipline, and patience. No matter how great the talent or effort, some things just take time.”
~ Warren Buffett
Tips for de-emotional investing
As ever we’ll leave you with some tips to remain confident in investing. To lay a foundation to manage those pesky emotions:
- Know what you’re investing in (and the risks involved) – if you can’t explain your decision to someone else, you probably don’t know enough.
- Spread your investments – the easiest way to do this is to select a fund that invests in a broad and balanced range of investments.
- Think long term and keep the end goal in mind – if you want to grow your money you need to accept risk, and history tells us risk fares better over a longer term.
- Only invest when you’re ready – ready means having a solid emergency fund, no expensive debt and you don’t need the money you’ll invest for the next five years.
- Sit back and relax – keep an eye on your investments, sure. But don’t obsess. Logging in daily to eyeball and tweak is bound to upset your emotional equilibrium.