It can be hard to hold your nerve when investing in the stockmarket. Share price gyrations, sudden market drops and fear of missing out can unsettle the steeliest investor. Such tribulations can undermine the discipline needed to make regular savings that will build into a nest egg for the future. So how should the long-term investor gain and retain the stockmarket returns they need?
Why is balance so important?
Professionals realised years ago that high returns are often won only at the expense of high risk. In other words, risk is as important as return or, as billionaire investor Warren Buffett put it, “Rule number 1: never lose money. Rule number 2: never forget rule number 1.”
In practical effect, this means investors should be prepared to accept lower returns if those returns are more reliable. The problem is that many investors often fail to appreciate the risks they are taking to achieve higher returns. Attaining good “risk-adjusted” returns means maintaining the right proportion of assets that provide growth, while balancing them against the right proportion to provide security when times get tough.
Over the past three decades there have been plenty of shocks to dissuade people from investing. Our data shows what happened after each event.
Wars, disasters, economic strife and political instability have been persistent themes over the last three decades and they can affect people’s attitude towards investing. In many cases they make an already tough decision to part with your money and invest even harder, leading some to not invest at all.
Behavioural scientists have a name for this: loss aversion. They estimate that the psychological pain of losing is about twice as powerful as the pleasure of gaining, hence why some people shy from the risks involved with investing. Yet as Schroders’ research shows, staying out of the stock market over the last 30 years could have proven costly. The eroding effects of inflation and historically low interest rates would have eaten away at the value of your money if you decided not to invest.
While investing in the stock market carries greater risks [the possibility of your losing all the money you have invested] and volatility [the value of the money you have invested going up and down] it could have boosted your returns. Of course choosing to invest depends on your personal circumstances and if you are unsure as to the suitability of any investment speak to a financial adviser.
There’s no quick answer to the million-dollar question of where to invest your hard-earned cash. However, there are some basic facts and rules that can help guide your decision.
Property is best, right?
We all love property. We all want to buy property. Whether we can afford to buy it is another question, but we all talk about house prices. Property has, after all, turned thousands of Britons – mostly the post-war Baby Boomers – into multi-millionaires. House price data from Nationwide building society offers some top facts – if you bought an average house 40 years ago, you’d have paid £13,820. Today, you could sell it for £211,443. That’s an overall increase of 1,429%.
Although it actually equates to a modest average growth rate of just 7%.
So how did everyone get rich?
Debt. Nearly every homeowner loaded up on it. In financial industry jargon, it’s called leverage. You buy a house for £100,000 and you borrow £20,000 for the deposit. The house price rises by 50% to £150,000. But your return is not 50%, it’s 62.5%. This is because your £80,000 investment has increased by £50,000. We’re often lectured about the evils of borrowing (rightly so when it’s excessive) but a little bit of sensible borrowing has its merits.
When markets fall the natural instinct is to sell. Our research highlights how costly it can be to miss the stock market’s best days.
Buying low and selling high is every investor’s goal. However, timing the market precisely is notoriously difficult, if not impossible. Research undertaken by Schroders shows how costly it can be when the timing is wrong. Over three decades, mistimed decisions on an investment of just £1,000 could have cost you more than £17,000-worth of returns.
Our research examined the performance of three indices that reflect performance of the UK stock market – the FTSE 100, the FTSE 250 and the FTSE All-Share.
If at the beginning of 1988 you had invested £1,000 in the FTSE 250 and left the investment alone for the next 30 years it might have been worth £23,800 by the end of 2018. (Bear in mind, of course, that past performance is no guarantee of future returns).
However, if you had tried to time your entry in and out of the market during that period and missed out on the index’s 30 best days the same investment might now be worth £6,749, or £17,051 less, not adjusted for the effect of charges or inflation.
The guidance and/or advice contained within this website are subject to the UK regulatory regime, and are therefore targeted at consumers based in the UK. Aspect8 Ltd is a chartered member of Best Practice IFA Group Ltd which is authorised and regulated by the Financial Conduct Authority.