The UK financial markets went down for nine successive days at the end of last month – so it probably doesn’t feel like a very safe time to be investing money.
If you already have a regular savings investment plan such as an endowment, or a regular stocks and shares ISA, Unit Trust or Child Trust Fund (investment version), you may be feeling more than a little worried about it, and even tempted to cash it in.
This is a classic example of “emotional investing”. It is human nature to feel an urge to invest money when times are booming, and when confidence in investment is high.
When the value of your investments goes down, fear creeps in, and it is common to want to withdraw your money for fear of losing even more. Research has shown that people are much more distressed by the idea of losing money than they are made happy by making money!
Reasons to stick with it
- If you withdraw your money out of an investment when it has gone down in value it means that you are “crystallising” your losses – with no chance of recovery.
- Keeping your money invested means that it has a chance of going up again in value when the markets recover.
- If you do come out of the other side, you will feel a real sense of achievement.
Benefits of falling markets
Yes, there are some. We’ve all heard that the right time to invest is when the markets are down. If you are investing a regular monthly contribution into a plan, this means that you benefit from something called “pound cost averaging”.
If the units you are buying in your plan are low (which they will be, if it has gone down in value), this works to your benefit, as you buy more of them for your monthly contribution. It’s a bit like a “bargain basement sale” – you’re getting more for your buck.
Assuming that the markets go up before you cash in the plan you will have made more money because of the volatile markets.
Moral of the story
There is definitely a lesson to be learned:
- Do not invest money unless you are happy to tie it up for the long term. We live in uncertain times, and one thing is for sure: if you want to get above-average return on your money, there is also a risk of above-average losses. However, losses mean nothing unless you are actually cashing in your investment. (Like your house, if it goes down in value, it only matters if you are selling it).
- Do not invest for the long-term unless you have a short-term emergency fund in the bank or building society. That way, if an emergency arises, you do have savings to fall back on, and you do not have to raid your investments.
- Consider how much risk you are prepared to take on an investment. You may wish to discuss this with an Independent Financial Adviser who will help you understand what the implications of risk on an investment are.
- The Money Advice Service also offers some great free guidance on understanding investments and risk.
Investing in equities (stocks and shares) has produced annual returns of 5.3% a year since 1900 (source: 2011 Credit Suisse Investment Returns Sourcebook. And that’s after inflation has been taken into account! So there is money to be made, but please follow the above rules.
Henrietta Oxlade is an Independent Financial Planner with Radcliffe & Newlands and MyFamilyClub’s in-house finance sage! She has been advising individual clients since March 1988, which is why many of her clients consider her part of the family. If you want to get in touch with Henrietta, email us on [email protected] and we’ll put you in touch.