Losses have more impact on us than gains. It’s a basic human instinct: we feel the bad more heavily than we feel the good.
Investing your money is as much about mindset as anything else. It’s about setting your expectations, as well as knowing the basics …
Watch your emotions
Our emotions affect our investment decisions far more than we think. Just like in life, what we feel drives a lot of what we do. So if our investments are falling in value, our emotions light up and we want to take action.
When news headlines and social media tell us how much investment markets are falling, it creates a confusing white noise. It can be intimidating. But in reality the markets are rising and falling all the time. It’s completely normal.
Yes, some people do lose on their investments. But losses are often a result of very common mistakes.
So stay calm and swat up. When investing gets scary step back – remind yourself of the truth.
“I might lose all my money”
It depends. If you investing in just one, or a small number of, companies or assets, you take on more risk and have a higher chance of total loss. The more you diversify the more you reduce this risk.
Also, scams are fairly common in investment world so it pays to be alert. If it sounds too good to be true …
“The next big thing is …”
Ah – the hype. Social media particularly likes to puff-up new, can’t-miss investments but the fact is, more than two-thirds of professional fund managers fail to beat the market.
No-one’s saying you can’t explore such opportunities but you need to know the risks. Only put in what you can afford to lose because the next big thing is less of an investment and more of a gamble.
Also, be sure to spread investment funds across different companies, sectors and investment types so you’re not too exposed if the next big thing falls on its face.
Ups and downs are inevitable
… they happen every day. Falls in value of 10-15% in a diversified investment are more frequent than we think.
The FTSE 100 fell by more than 10% multiple times through the 2010s. Bitcoin did the same.
The key is not to panic or do anything rash, hence why it’s always recommended that we invest over a longer term and add to your investments on a regular basis.
“I’m waiting for markets to fall so I can buy when prices are low”
Often, those who say this are still waiting for the perfect moment to invest ten years later.
The best principle to follow is to invest when you have money, and take money out when you really need it.
‘Timing’ the market doesn’t work. If someone does manage to do it successfully, they’ve basically got lucky. It could have easily gone the other way.
Keep some key principles in mind
The above points cover some investing mindset basics, so here’s some practical things to consider:
1 . Investments make returns in different ways
- Shares grow in value as the share price increases.
- Companies share their profits with investors by paying dividends
- Properties generate rent
- Bonds pay interest
2. Choose companies carefully
Some companies are well-established so may seem safer, yet the returns aren’t likely to be dramatic. Newer companies may have stronger potential for growth, and returns, but they can present a bigger risk.
3. At home or elsewhere?
It’s a decent idea to look beyond UK companies you know and love and observe what’s happening elsewhere. In a globalised world there’s plenty of information about international companies, and they too can be interesting investment opportunities.
4. Know your funds
- Funds are typically ranked according to their level of risk. Some funds aim for rapid growth and take more risk, while some funds aim for steady growth and take only moderate risk. Some funds focus solely on one specific sector of the economy, such as technology, while others invest across several sectors and industries. Different funds have different costs.
- “Passive” or “tracker” funds follow a market index like the FTSE 100 (an index of the top 100 companies in the UK) or the S&P 500 (the top 500 companies in the US).
- “Active” or “managed” funds are where a human fund manager chooses investments. Research suggests that managed funds don’t make more money but you may select this option to ensure there’s a fund manager in place who’ll choose investments that reflect your priorities.
- Making big money on your investment may not be the only thing that matters. It’s important to think about what your investment funds represent out in the world. Does your investment reflect your values and support the kind of world you want to live in? To use investments as a vote for change you can explore ethical, sustainable and impact investment opportunities.
Where to invest? Where to begin?
Your money is part of your life that shapes your life. So think about what matters to you, then think about what you want your money to do and by when.
If you know the investing basics, but aren’t completely clear which direction to travel, your financial planner can help.
A qualified financial planner can become your thinking partner in money matters. They’ll help you work out the best ways to invest your money so that it speaks to your goals, your ideals and the life you want.