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Planning

What is financial goal setting?

Have you ever tried setting new year’s resolutions for your finances? Maybe you’ve tried a no-spend month. Or decided you want to save an extra £100 a month.

But by mid-January you’ve already been sales shopping and blown your budget.

I’m not the biggest fan of new year’s resolutions as they’re often focused on not doing something, rather than doing something.

I prefer the latter as it’s more positive.

That’s where financial setting goals comes in.

Pinterest: What are financial goals?

What are financial goals?

Setting financial goals makes it easier to achieve your life goals, as many goals involve money.

It’s the first step in planning financially for your future.

Financial goals can include short- or mid-term goals – such as paying off debt or saving for a dream trip – and long-term aims like saving for retirement.

What is the purpose of financial goal setting?

Financial goals give you clear direction.

With no specific goals in mind, you’re likely to spend more. An extra £5 here, £10 there.

Having a clear goal can help you stay on track when it comes to saving and spending day to day and month to month. This can help you reach your dreams faster.

Overall, setting and working towards financial goals can help you get ahead in life. You can save up for your big dreams like a once-in-a-lifetime trip or buying a house.

Setting financial goals can help you focus on where you want to be and plan how to get there.

What are the three types of financial goals?

Financial goal setting is an important process for any individual or couple looking to plan for the future. It involves goals in three distinct timeframes: short term, medium term, and long term.

Short-term goals are those that can typically be achieved in less than a year.

Medium-term goals are those that may take up up to 5 years to achieve, such as saving up for a deposit on a home or paying off your car.

Long-term financial goals, or lifetime financial goals, are those that are designed to provide financial stability and security over the course of your lifetime, such as funding a comfortable retirement or paying off your mortgage.

What financial goals are not

They’re not your to-do list. Like tracking down your pensions.

Nor are they your retirement plan.

Nor your investment strategy.

Financial goals are based on your dreams and aims.

Once you’ve decided what you want, you’ll need to plan specific steps to achieve your goals. But first you need to be clear on what you want.

What is the first step in setting your financial goals?

This process involves thinking deeply of the life you’d like to have. Next, take the time to analyse your current financial situation. After that you’ll be able to set specific, time-bound objectives that will help you reach your desired future.

Here are some tips for figuring out your financial goals:

Visualise your future

Think about what you want your life to look like in the future, and then work backwards from there.

Once you have a good idea of your end goal, it’s much easier to figure out the steps you’ll need to take and you can start to make specific plans to get you there.

Think about the details

For example, if starting or expanding your family is on your mind – where will you live? What kind of house? Do you want or need flexible working so you can spend more time with them? Where will you holiday? Do you want to set them up with a nest egg when they come of age?

If you want to retire early – what will that look like? What will you do with your time? Travel? Spend more time on your hobbies? Move to be closer to family?

These things will impact how much money you’ll need. By thinking through the details you might realise you need more (or less!) money than you first thought.

Create a vision board

Once you have some ideas on your dream future, you may find a vision board helps inspire you to work on achieving your dream.

A vision board can be a physical board with images from magazines, words and phrases that represent your ambitions, or it can be digital. You can make it in Powerpoint or use a Canva template. Whatever works best for you.

General vision board example

A visual representation of your dreams can help you stay focused on achieving your financial goals.

Ask yourself why is your goal important

It’s important to ask yourself why each goal is important to you. How will you feel when you pay off your mortgage? How will it feel to go on the trip-of-a-lifetime?

Keeping your “why” in mind can keep your motivation levels high – allowing you to reach your desired goals more quickly.

So it’s actually really important to have a clear reason.

Because saving money can be hard.

Saving for something specific like a house deposit or a round the world trip is much more motivating than just ‘saving’.

It can help to name your savings accounts or, if your banking app allows it, create named savings pots to keep reminding you what you’re saving towards.

Secondly, what you first think of might not be something you truly want or need. For example, you might think you want to upgrade your car, but when you dig deeper that’s because you’re trying to keep up with the Joneses and what you really need is a car that’ll fit a pushchair in it. Which your current car does.

Or your goal might be masking another goal.

For example, you might have a vague idea of buying a house to secure your financial future. But if your true aim is steady income while you retire abroad, that house might not be the best solution.

>> A financial coach can help you figure out your financial goals.

Taking the time to consider why your goals are important will help ensure that you have the necessary focus and commitment to achieve them.

Take your current financial situation into account

Goals are unique to each individual. We all have different dreams and we all have different starting points.

Considering your current financial situation may help you classify your goal as short/medium/long term. This will help you set realistic timeframes for achieving your goals.

Additionally, thinking about your current finances can help you identify potential barriers that could prevent you from reaching the milestones you want to.

Once you’re clear on what you want and where you’re currently at, you’ll be able to make specific, actionable plans to achieve your goals.

What are some examples of financial goals?

Financial goals vary from person to person. Whether a goal is short term or medium term depends on your starting point. Some common money goals include:

Short-term objectives that can be set and achieved in anything from 3 months to a year while mid-term objectives could be up to 3 or 5 years.

Here are some examples of short- or mid- term financial goals:

Beware of confusing to-do list tasks with short-term financial goals. Things like finding a better interest rate for your savings can be sorted in an hour or less. As could consolidating your old pensions if you have the account details to hand.

If you have a few of these smaller tasks, you could set a short-term goal to ‘organise my finances in 3 months’ or ‘sort out my pensions’ including logging in to your current pension provider and finding out what you’re actually invested in, what the fees are etc.

Long-term financial objectives are bigger goals that require more than 5 years, including goals that will help set you up in retirement such as:

  • purchasing or upsizing a home
  • paying off your mortgage early
  • funding a comfortable retirement
  • buying a house by 40
  • retiring by 60
  • providing a nest egg for your children
  • feeling financially secure

Some of those could be medium-term for you – it depends on your starting point.

Final thoughts on financial goal setting

Financial goal setting is a powerful tool to help you gain peace of mind, reach financial security and have the money to achieve your dreams. By visualising your future, you can put yourself in a better position to make smart financial decisions and plan the steps you’ll need to take to achieve your goals. This will also help you stay on track and motivated.

Whatever your life goals may be, setting financial goals can help you take control of your finances and progress towards achieving your heart’s desires.

Do you have any questions about financial goal setting? We’d love to hear from you.

Struggling to figure out what your financial goals are? Book a free 45-minute coaching call.

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Investing

How do investors make money in the stock market?

The main reason to invest to make money. Of course you have to consider the risk of investing and balance that with the potential reward. But how do you actually make money from investing in the stock market?Pinterest pin: How to make money investing in the stock market

This article explains the two ways you can make money from investments.

Make money from increases in share prices

The first way to make money by investing is through increases in value. Assuming your stock market investments increase in price over time, this increases your net worth.

Ultimately the investments could then be sold for profit.

The simplest example is real estate. If you bought a house for £200,000 and it increased in value to £250,000, you could sell it for a profit.

The same is true for stocks and shares.

For example, if you invested £1000 in an index fund when you were 28. A conservative estimate is 4% growth per year on average (some years may be less, others may be more).

Your £1000 may possibly approximately grow like this:

Year 5 £1216
Year 10 £1480
Year 15 £1800
Year 20 £2191
Year 25 £2665
Year 30 £3243
Year 35 £3946
Year 40 £4801

By 68 your original £1000 could be worth around £4800. (Or it could be worth more or worth less. With the stock market no-one knows.)

This is without adding to that original £1000. It’s just gaining value as the stock market fluctuates but slowly travels upwards over time.

At 68 you could then sell your £4800 of investments and use the money to go on a cruise.

Multiply that initial £1000 by 10 and those numbers quickly jump.

Have £10,000 invested by the time you’re 38 and that could grow in value to over £30,000 by 68.

Boost your investment gains by buying low and selling high

The basic principle of stock market investing is buy low and sell high.

This applies whether you invest in funds, in real estate or stocks in individual companies.

But actively following the market and trying to calculate when to buy and sell is a tricky business. Professional analysts don’t always outperform the typical index fund.

The logistics of selling – drawing down on your investments in retirement and rebalancing your portfolio due to stock market changes – are topics for another day.

Recap: If your investments increase in value, you can make money by selling them for profit.

But you may not want to sell these assets.

What if you don’t want to sell?

You’ll probably want to live in your house or sell it to buy a new one. (That’s why your house isn’t truly an asset.)

If you’re investing for your future, you’ll generally want to keep a chunk of money invested whether that’s for early retirement, a sabbatical year or a house deposit.

So other than selling your investments, how can you make money from investing in the stock market?

Make money from quarterly payouts: investment dividends

The second way that stock market investments make you money is by paying you dividends.

How dividends work

For each share you own you are periodically paid a dividend. These are usually paid quarterly. This amount varies per fund and per quarter but you could typically expect it to be in the region of 1-5%.

For example, let’s say you had 20 shares in VHYL – a high-yield global ETF. (At the time of writing, this would be approximately £960 invested).

Historical data on VHYL dividends from 2020 to 2022
In the last three years, having 20 shares in VHYL (approx £960 invested) would have generated $30 – $45 passive income per year. If you instead had £9600 invested, we’d be talking $300 – $450 per year.

As you can see from the table above, the dividend per share is set each quarter depending on factors like the performance of the companies in that fund.

The historical expected yield for VHYL is around 3% (that’d be something like £300/year for each £10,000 invested). In reality, it varies from quarter to quarter as shown in the table.

Do all funds pay dividends?

Some funds don’t pay out dividends but are instead set up to automatically reinvest your dividends.

For example:

VWRL is a distributing fund which pays dividends while VWRA and VWRP are accumulating funds that automatically reinvest.

Which to choose? Theoretically there is no difference in terms of return on your investment. In practice, it depends on what you do with your dividends. If you  withdraw and spend your dividends, you’ll have less in your investment account than you would if you kept the dividends in there and bought more funds with your dividend payout.

How do I decide what to do with my dividends?

If you want to start living off your investments, dividends are handy because you earn money every quarter without having to sell your investments.

So you may wish to invest in distributing funds.

Whereas if you’re still a long way of potential retirement or have other long-term goals for your investments, there’s a bit more to consider.

There can be advantages and disadvantages to each share class, particularly if you’re in Europe or your shares aren’t in an ISA.

Accumulating funds automatically reinvest making them easy, hands-off investments. This is particularly good if:

  • your provider has a dealing fee
  • you don’t invest regularly
  • you don’t want to manually check your account to reinvest the funds

However, some platforms offer a reinvesting service where they’ll reinvest the dividends from your distributing funds for you. So the above would be less relevant.

How do you know if a fund is accumulating or distributing?

After doing your research you may have a preference for one or the other. Or you may be keen to get investing now without getting bogged down in too many details.

In any case, it’s good to know how to check the share class of a fund you’re interested in.

You’ll find this information in the Key Investor Information provided by your investment platform.

Where to find the share class for investments via Vanguard

Other platforms may tell you the share class when you look up the fund.

Where to find that iShares S&P500 is distributing on InvestEngine
On some sites like InvestEngine*, the share class is clearly labelled – Dist = distributing

How much could the dividend payout be?

 

What does all this mean for the average investor?

Depending on your investment goal, you could choose a growth portfolio or an income portfolio.

A growth portfolio is for investors looking to build their assets. For you investments are for long-term growth so you’d be looking to reinvest your dividends to get you to your goals faster.

An income portfolio is for investors seeking income from their assets. You’d be looking for funds, ETFs and/or bonds that tend to have a high yield (ie. the dividend payment is typically high). This would generate passive income from your investments.

You may find that you want a mixture of the two or that you have different goals for different investment accounts. For example, one goal for your pension and a different goal for your Stocks & Shares ISA.

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Saving

How to create a financial safety net – 3 essential steps to keep you and your family financially secure

When it comes to finances, a lot of people are looking for peace of mind. To feel financially secure, it’s important to know that your financial needs will be met even if something should happen to you or your partner.

Have you ever mapped out what would happen if you lost your job or got into an accident that may prevent you from earning a living for a few months. Can you continue to provide for you and your loved ones? Do you have something in place to make sure the bills continue to get paid?

One way to achieve financial security for you and your family is to create a financial safety net. This safety net can be a plan and money set aside for unexpected expenses or tough times. By having a plan in place, you can rest assured knowing that you and your family will be taken care of financially.

If you don’t have plans and savings in place for tough times, now is the time to get started.

How to create a financial safety net

1. Save an emergency fund

Saving an emergency fund is the first layer of your financial safety net. This is a fund that you set aside for unexpected expenses or emergencies.

Having this fund can help you feel more secure as you’ll be prepared for unforeseen circumstances like car repairs, a broken boiler, emergency vet bills or replacing your phone if it suddenly gives up the ghost.

This fund is meant for emergencies, and should be separate from other savings like your holiday fund or house deposit.

For your emergency fund, ease of access is more important than interest. You want to save it in an easy-access account where you could withdraw money to your bank account within hours.

Savings tips for building your emergency fund

Decide a percentage of your net income that you could contribute monthly. To make this step go even faster, add any bonuses, tax refunds, or round up your spending.

Do not raid your emergency fund for holidays or other non-emergency spending.

2. Build up a cash buffer

Once you have a healthy emergency fund, the next step is having three to six months’ worth of living expenses saved in an interest-bearing account.

Some people called this a “freedom fund” or a “f* you” fund, as this safety net or cash buffer allows you to quit a toxic job and survive while you’re looking for a new one. It could also be used to help you cover the shortfall in your income if you were to end up on statutory sick pay for a while. A cash buffer a powerful asset for financial stability.

How much cash buffer do you need?

First, figure out what you need to comfortably live on for a month. The starting point is your average monthly spend.

You could calculate your cash buffer using this sum, or you could trim some of the non-essentials like a cinema date or brunch with a friend. For a time you could switch to a lower cost option like a film night with microwave popcorn or a walk and takeaway coffee. It’s important to make sure you’re still doing some things you enjoy and not to assume you’ll be okay with eating beans three times a day and only socialising on Zoom while looking for a new job.

The aim is to find a realistic sum you could live off each month if all income stops.

Then multiply this number by 3 to start with. You may later feel more comfortable with 6 months’ expenses, depending on how easy it would be for you to replace (or partially replace) your income.

Once you know your cash buffer figure, start saving as much money as you can to build up this safety cushion.

If you’ve managed to build up an emergency fund already, you can use the same process to build your financial safety pot. For example, automate a monthly contribution to your safety net fund and add extra when you can.

Remember this money needs to be accessible if you end up needing it, but unlike an emergency fund you don’t need instant access. You might decide to buy premium bonds or put it in a fixed-rate savings account where you can access it with some notice.

Revise your safety cushion number periodically

Plan to come back and revise your monthly expenses number from time to time. Your living expenses may go up or down over time and you can adjust how much you need to set aside in your safety net.

Alternatively, you may have started with a 3 month fund, but decide to increase that to give you more wiggle room.

3. Consider insurance

Particularly for those with dependents, life and critical illness insurance can be part of your financial safety net. Does your family have enough in place to continue to cover your living expenses if you can no longer work? What if you or your partner have to give up work to care for the other?

Illness can hit any of us unexpectedly, so it’s good to have a plan in place.

You may have insurance from your employer, but look at the terms to check your policy will pay out enough. If not, you may want to get some additional insurance of your own or save more in your financial safety net.

4. Keep saving, or start investing

Once you have the three parts of your safety net firmly in place, consider investing any additional savings.

Investments are made with the long-term in mind. That is, money that you don’t expect to spend in the next 5-10 years. By investing it, you hope to gain better returns than you would in a savings account. As inflation rises, your cash savings lose value in the face of rising costs.

While you don’t want to be in a position to dip into invested money, it may come in handy when dealing with a long-term financial emergency. This is a fourth element to your financial backup plan.

If all goes well and it turns out you don’t need the money you’ve invested, your investments can help you to retire early or work part-time as you approach retirement.

Final thoughts on creating your financial safety net

A financial safety net is an important way to protect yourself and your family from unexpected expenses and get you through tough times. It’s important to come up with a plan that’s right for you and your family to give you peace of mind whatever the future may hold.

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Investing

Want to invest? First understand investment risk and reward

When you want to start investing, there are a number of questions you’ll need to answer. One of these is what to invest in?

Consider that the market will always have ups and downs. How much can movement you stomach?

Answering these questions requires an understanding of investment risk and reward. Secondly, you need to determine your own level of risk tolerance for your investments.

Dice showing the words profit, loss and risk - key aspects of investment risk and rewards
Potential profits and potential losses are part of the risk and rewards of investing

In this article, we’ll talk about investment risk and reward, and how you can manage investment risk. We’ll also explain how low-risk, high-return investments can be a great way to achieve your financial goals.

What do we mean by “investment risk and rewards”?

Before we get started, let’s first define some key terms.

Investment Risk: The risk of loss associated with an investment.
Let’s say that you decide to invest in a stock. This has a risk of loss as the price of the stock could go down. This risk of loss comes from a number of factors, including the company’s financial stability, the market conditions, and the individual factors involved in the stock.

Investment Reward: The amount of return that an investment provides.
In contrast, a stock that is going up in value has a reward associated with it. This reward can be through increase in value of the stock from when you bought it. If you sell the stock you profit from the increased value (known as capital gains).

Another way you can receive financial reward from your investments is by being paid out quarterly/annually dividends.

When you make an investment, you are taking on the potential for both risk and reward. It is important to be aware of these risks and rewards before making any investment decisions. This will help you make informed decisions that should lead to a higher return on your investments.

How risky is investing?

The level of risk associated with any given investment will vary, so there’s no one answer.

Broadly speaking, investments can be considered to be risky if they offer a potential for high returns but also high risk of losses.

The risks and rewards of common types of investment assets

1. Equities

Stocks in particular companies

Shares in individual companies are perhaps what first comes to mind when you think of investing.

Stocks and shares are fractions of ownership of a company. Investing in one particular company is generally considered to be a risky investment because it offers the potential for significant returns (often in the form of capital gains – ie. price increases) but also the potential for significant losses if the stock market declines (ie. price decreases).

Buying shares in one particular company is the riskiest type of stock investment, as the return depends entirely on the performance of that company.

This type of investment is a form of active investing. You need to know what you’re doing to attempt this kind of investment. There’s an element of timing the market – you’ll have to monitor how the stock’s doing and try to analyse when to buy or sell.

Funds and ETFs

A common way to invest in stocks/shares is through a fund. This is less risky than the previous option as a fund invests in a range of different companies. Instead of owning a slice of one company, you own a smaller slice of multiple companies. For example, you could invest in a FTSE100 fund meaning you’d have a small share in the companies that make up the FTSE100.

This spreads the risk of one company performing badly, and you share the burden with other investors.

There are different types of funds – mutual funds and exchange-traded funds (ETFs) being the most commonly used by the average investor. As equities, these are still risky assets but different funds come with different risk levels. On the whole, they are much less risky than stocks in individual companies.

These investments can be passive, where the fund’s investment choices are set in advance, or active where a fund manager tries to buy shares in the individual companies in that fund at the right time to outperform the market. Active funds come with higher fees for this service.

2. Bonds

In contrast, bonds (which are typically issued by governments or other organisations with a long-term credit rating) are generally considered to be relatively safe investments. You effectively loan your money for a fixed period (often 5, 10 or 15 years) and they guarantee you’ll get your money back at the end of the bond period, plus a bit of interest. This interest is how you earn money with bonds.

Bonds tend to have a much lower return on your original investment than stocks. However, they are far less risky and tend to provide stability and protection against inflation.

3. Cash and Gold

Some people invest in gold as a hedge against inflation or keep part of their portfolio in cash. You’ll get very little return on these, but they are stable in the event of a market crash.

Cash, however, loses value as inflation rises. So while it’s safe, your money ends up worth less.

4. Property

By investing in property, we’re talking about buy-to-let properties or investing in commercial property (often through a kind of fund). Investing in property doesn’t include the home you live in. A lot of people mistakenly think that their house is an asset, but your home shouldn’t be counted as one of your investments.

The housing market has peaks and troughs just like other types of investments. Homes can increase and decrease in value. This means you face the risk of losing money if the value of the property falls and you want or need to sell.

5. Cryptocurrencies

Bitcoin is a digital currency created in 2008. Since then, the price has gone up and down dramatically and frequently. It is considered as volatile, so it’s a risky investment.

There are many controversies around Bitcoin, from the amount of electricity needed for Bitcoin mining, to through to the fact that the currency anonymity is attractive to money launderers. For a time Tesla accepted payment in Bitcoin, backtracking just months later.

Ether is the second largest cryptocurrency. It’s often referred to as Ethereum (which is actually the system, not the currency). There are similar concerns about energy use.

Another risk factor worth mentioning is the risk of losing your key to access your Bitcoin. This access code must be kept safe. You could lose everything by accident by keeping your key on USB and losing that, or if your hard drive dies on you.

Do I need to invest in all of these?

No. Many investors choose a simple investment portfolio with two types of investment – riskier equities and safer bonds. Some people add a small amount (eg. 5% or less) of very risky, active investments like individual company stocks or cryptocurrency.

A key question then, is what proportion of each should you invest in? We’ll get to that later in this article.

And what about investment rewards?

That was a lot about risk. So what about potential rewards? In fact, risk and reward are two sides of the same coin. Riskier investments are more likely to produce higher rewards. But they are also more likely to cause losses.

When choosing what to invest in, you should consider if the potential reward is worth the risk.

Investment rewards come in two forms – increases in value and dividends. You can read more about those forms of reward in this article – How to Make Money in the Stock Market.

How to determine your investment risk and reward appetite

So how can you figure out your risk and reward tolerance levels so you can decide what to invest in?

3 questions to help you understand your investment risk tolerance

Your answers to the following questions can help you determine your investment risk tolerance:

1. How far away from retirement are you?

It’s important to consider how long you plan to hold your investments. The longer that time period is, the more chance there is to recover from dips in the market which lower the value of your investments.

If the market dips in 2023 but you’re not retiring for another 15 years, then it doesn’t really matter that the market dips in 2023. You won’t be selling your investments, so it’s irrelevant.

This is one reason why it’s good to automate your investments and leave them be. The more you check the current value, the more anxiety you cause for yourself.

In short, the further away you are from retirement, the more risk you could consider taking in your investments. And conversely, the nearer you are to retirement, the more you may wish to go for conservative investments.

2. How much volatility do you feel comfortable with in your portfolio?

What if the markets crash tomorrow and take a while to recover? How big of a loss can you tolerate before you panic or feel sick with worry?

What if your investments were to drop 20% in value? 50%? How much loss could you tolerate short-term? Play around with the figures and pay attention to the feeling in your gut. Can you keep calm, hold onto your assets and wait for the market to recover?

Worry is real when the market dips. Some people panic and sell at a low price because they’re scared the market will drop further. However, the best thing to do is hold onto your investments (or even invest more) and wait for the market to recover.

Some people need to balance riskier assets with conservative ones (like bonds) to help them keep their cool in this situation. That’s fine – you just have to work out what you personally are comfortable with.

Once you know how much loss in value you could tolerate in a market downturn, you can start to think about how much risk is acceptable for your portfolio.

Some people, regardless of how much they’re worth, will say “no problem, let’s go for it”. While others will carefully evaluate their financial worth and be willing to risk only a certain percentage of their overall wealth.

It is ultimately up to each individual investor to decide how much risk they are comfortable taking on board. Your fears and your likely reactions to market dips need to be considered when deciding your risk tolerance. If you are likely to lie awake at night worrying, you may choose to hold more conservative assets to balance out the riskier investments.

3. How much money are you comfortable locking away?

If you think about your investments as being locked away, it’s easier to take on risk.

The money you hold in investments should not be money you need in the near future.

Before you go opening a Stocks & Shares ISA, you want to make sure you have a cash buffer. You don’t want to have to sell your investments in an emergency.

If you’re forced to sell, you might have to sell at a loss if the price is down when you need the money.

Final word on investment risk and reward

No matter which method you use to determine your investment risk and reward tolerance, remember that no investment is guaranteed and there is always potential for loss. It’s important to have a plan for dealing with losses (mentally as much as practically) and making sure that your overall investment strategy meets your goals and financial needs.

It’s wise to know your level of investment risk tolerance before you start investing. Because investments are so integral to you and your family’s financial future, it’s important you be intimately connected with your gut feelings, your ideas about investing your money and the risks involved.

By seriously considering the above questions and your responses, you’ll be able to determine your risk tolerance for investing and choose a suitable investment portfolio that matches your comfort levels.

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Investing

Are investments safe? 10 ways to handle investment fears

Many people are afraid to invest out of fear of losing their entire investment. Investing is not without risk. However, there are a few steps that can be taken to help ease these fears and to try to ensure that your investments are safe in the long-term.

  1. Are investments safe?
  2. Learn to minimise investment risks
  3. How I faced my investment fears
  4. What’s at the root of your investment fears?
  5. Are investors risk averse?
  6. How to handle investment fears
  7. Final word on investment fears

Are investments safe?

Investing is a complex and risky process. While there are 1) historical trends, and 2) economic theories that should mean your investments rise in value over a long time scale, it’s important to remember that no investment is truly risk-free. Even the safest investments could lose money over time.

Investing is meant to be a long-term strategy. There will be both ups and downs. You need to get your head round this before you’re ready to invest. When you can handle the occasional bumps in the road, investing should be a great way to grow your money over time.

Learn to minimise investment risks

So while there are risks involved with investing, there are also ways to minimise those risks. For example, always do your research before investing in anything and diversify your investments (ie. don’t put all your eggs in one basket).

If you don’t invest, there’s no chance of reaping the rewards of investing. So don’t let fear of losing money keep you from investing at all.

It’s true that your investments can lose value. However, if you choose your investments wisely, it’s unlikely you’ll lose all of your money.

Woman worrying - are my investments safe?
Don’t let worries about keeping your investments safe prevent you from investing

How I faced my investment fears

Investing is not something most people can jump into overnight.

I wanted to invest for months before I actually opened an investment account. But several things held me back.

At first, I didn’t know anything about investing. I thought it was trading which seemed risky and only for men in grey suits.

I didn’t know anyone who invested. Then I read about robo investing accounts on Faith’s blog. Slowly, investing started to seem possible and I dove into the world of personal finance and FIRE (Financial Independence, Retire Early). I read and read and figured out the basics of investing in funds, but it still took me a few months to pull the plug.

Investing is scary initially. But it doesn’t have to be.

So let’s look at common investing fears and worries that hold us back from starting to invest.

What’s at the root of your investment fears?

Worries about keeping your investments safe are centred on the fear of losing money. It’s scary watching your money lose value.

But with inflation, money stashed in cash savings for 20 years also loses value. What you could buy for £1 in 2000 costs much more than £1 today. So your money is slowly losing value anyway.

That’s where investing comes in.

The stock market will always go up and down. That’s why investing is a long-term strategy.

The challenges are:

1) not worrying about the fluctuations and putting your trust in your long-term strategy.

2) keeping your cool when when the market crashes. Will you be able to resist the panicked temptation to sell your stocks at a low price? Will you be able to afford to lose money? If you’re close to retirement, will a shrunken pension pot affect your ability to pay your day to day costs?

Are investors risk averse?

According to financier Warren Buffet, people who place money in the stock market should do so with a long-term outlook. You need to be comfortable with short-term losses to reap the rewards of long-term gains.

Interestingly, Buffet poses that the two emotions most experienced by those who invest in the stock market are greed and fear.

He believes that the public has it backwards when it comes to managing their feelings during market fluctuations. Smarter investors do the opposite of what the majority of investors do.

When “everyone” is saying how great the stock market is doing and discussing the incredible growth of their stocks and funds, this is the time to be wary. On the other hand, when the market is down and everyone’s investment fears are on high alert, that’s the best time to buy. His reasoning is that, since everything costs less in a down market and we’re in the market for the long haul, we’re bound to make a profit long-term.

It’s sound advice.

How to handle investment fears

Investment fears are natural, but don’t let them put you off investing. There are several ways to minimise these investment fears and feel confident that your investments should be relatively safe in the long-term:

1. Recognize that fear is a normal human emotion

It’s healthy to have fear, as long as you know there’s a reason for your concern. Everything outside of your comfort zone causes fear at first. If you can overcome your investment fear, you are likely to experience healthy increases in your net worth over time.

2. Accept investing is a long-term strategy

Accept the ups and downs. The stock market will rise and fall.

Accept the fact that investing in the stock market is unpredictable. It is what it is. Even if you’re a stock market analyst, you can’t predict with perfect accuracy which stocks and funds will soar and which will tank.

The longer you invest, the more time you have to ride out the rollercoaster and wait for the market to recover.

If you’re not able to adopt this perspective, you might not be ready to invest. You could consider starting small, or paying a little extra into your pension (which is also investing but you know it’s locked away until retirement so it helps you to focus on the long term).

3. Educate yourself – learn about investing

It’s important to educate yourself. The more you know, the less scary or overwhelming investing becomes. There are plenty of resources out there to help you understand how investing works. Reading books and blogs, or listening to podcasts or watching YouTube videos can be a great way to get started.

Talking with people who invest (or lurking in investment communities) can also be a great way to get more information and reassurance about the safety of investing.

4. Understand your risk tolerance

When the stock market starts to drop, investment fears set in. Those fears can take over your capacity to manage your money and investments successfully, unless you confront them head-on.

Some people tolerate fluctuations well and others panic. Knowing where you fall on that scale will help you to choose investments that you feel comfortable with.

Think about the worse case scenarios in advance and plan how much you can afford to invest.

Take your current situation into consideration when deciding what to invest in. If you’re due to retire in 5 years, you might not have enough time to invest in aggressive growth stocks so buying bonds, which are less volatile, may be a bigger part of your strategy. However, if you still have 15 or 20 more years of working and saving, you have time to ride out the crashes and wait for your assets to grow.

5. Diversify your investments

Investing in a stock or fund and hoping to make a huge profit is a thrill for some people. But investing in a single company always carries a big risk.

Investing in funds means you invest in many companies which spreads the risk.

Diversification provides some built-in protection against suffering major losses in the stock market.

This doesn’t mean you need to invest in 10 different funds. For many, a simple three fund ETF portfolio is enough.

Others may want to put most of their money in relatively safe funds, but to invest a small portion of their wealth into riskier individual stocks.

Diversity is important, but how you diversify is ultimately your choice.

6. Start with regular small investments

When I started investing, I had a couple of thousand that I wanted to take out of a low interest savings account and invest. But that sum was scary so I continued reading and researching for a few more months. I really wish I’d started immediately with small monthly contributions of £100 or £200. That would have allowed me to get started and feel comfortable investing before injecting a larger sum later.

Invest small amounts regularly

By investing regularly you become more comfortable with investing. Investing stops being scary and unknown – it becomes normal. Something in your comfort zone.

7. Don’t check your investments too frequently

One of my best investing tips is – set and forget. In other words, automate your investments and don’t closely monitor how they’re doing.

Checking your investments too regularly can cause you to panic when they’re on their way down. On the flip side, if they’re on the way up, that could make you feel (over)confident in your abilities. Even paid investment professionals rarely outperform a good index fund.

8. Invest in spite of your fear

Research your investments thoroughly and make “Feel the fear and do it anyway” your personal mantra. Investing wisely can allow your money to grow over time, easing your fears in the process.

Make investments when prices are low, and watch your money grow over time. If you have years to build your investment pot, you’ll be able to take advantage of market dips and crashes and invest more when prices are low.

9. Simulate an investment portfolio

There are sites like JustETF where you can simulate investing.

Choose your funds and how much you’d theoretically like to invest. Then sit back and watch how they rise and fall over time.

This can give you a real understanding of how the stock market rises and falls over time. While your investments may go down in value one month, they could rise in value the next. Or you may see decreases for a few months in a row before the value begins to climb.

By watching what the market does with theoretical investments, you can learn your tolerance to risk and whether you’d be happier with a low-risk portfolio, a moderate portfolio or a riskier one.

10. Talk to a financial advisor

There’s a reason I’ve left this until last, as I believe there’s a lot you can do to educate yourself.

A financial advisor can help you understand your investment options and help you mitigate the risks involved with each option. They can advise you on specific funds and the ideal balance for you. This becomes more relevant when you have a large portfolio and/or as you near retirement. Some recommend talking to a financial advisor around 5 years before you plan to retire.

Even then, I’d recommend educating yourself first so you know what questions to ask. If you want to consider talking to a financial advisor, this is a great article on how to choose one.

Final word on investment fears

Gathering information from experts and learning to examine your feelings about investing and confront your investment fears are important aspects of your investment life.

Being aware of the different types of investment fears, and how to handle them, should help you to make sound investment decisions that will safeguard your financial security, skilfully manage your portfolio and keep your investments safe.

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