The Basics of Investing & Why We Should Get Started
You Don't Need Millions To Start To Invest
As I mentioned in my previous blog, we should focus on making sure that our money works smarter. Investing the money we have is particularly important in divorce because naturally, as assets are split, there is less in the pot.
We would, of course, all like to have millions to invest, but we often don't, and it simply isn't true that you need to be super-wealthy to make an investment and grow our wealth.
There are certainly options to invest small sums or small regular income payments in today's modern technological world. I am always preaching the benefits of investing as soon as possible due to the benefits of compound interest.
For example, if you invest £100 and receive a 5% in year one, you will have £105 at the end of the year, so your starting investment in year two is higher. If you do this over several years, the incremental benefits should add to significant gains over the years. It is, therefore, no surprise that Einstein described compound interest as the 8th wonder of the world.
Women tend to be traditionally more risk-adverse when it comes to their finances, but not all risk is wrong, and there is no such thing as a risk free investment.
- Poppy Fox
Cash is frequently considered 'low risk,' but it isn't 'low-risk when you take inflation into account. However, you need to invest in a plan and understand the risk you are taking. It is helpful to start with an idea as to the purpose of the investment.
Is it a pension, school fees, planning, a second home, or a rainy-day fund?
Knowing the goal will help you understand your time horizon and, consequently, how much risk you would like to take? Investing in a pension at the age of 25 has a higher capacity for risk than someone of 65 years who has a pension and is about to retire. Your objective will also help you decide whether you will be taking an income now or in the future, impacting the style of investments you choose.
The stock markets can be volatile, and at Quilter Cheviot, we often talk about 'time in the market' rather than 'timing the market.' Yes, you might hear that story at a dinner party about someone who timed things just right, but I suspect there are just as many people who timed it not quite so right but funnily enough, they aren't shouting about it.
When looking to invest, you should consider having your funds invested for at least three years but ideally more, and sit tight and not panic if we see a market downturn.
We can reduce volatility in a portfolio via diversification, which is the concept of not putting all your eggs in one basket.
Instead of buying one fund or index, you could look to create a balanced portfolio with exposure to various asset classes and geographies again to spread the risk and hopefully maximise returns. Often people think of equities when they think about investing (i.e., stocks and shares). Still, it is also prudent to look to have some fixed interest holdings and alternative investments such as property, infrastructure, and absolute return funds.
As an investment professional, I am aware that we use so much jargon, so perhaps in a future blog, I'll run through all the asset classes we invest in case you are wondering what these all are.