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The ups and downs of investing

What do you want to know before you think about investing?

Ah, investing! Don't shrink away from the screen like that - it may sound complicated, but, like most things in life, it's nothing to be afraid of once you know a bit more about it.

Investment is all in the numbers. Not keen on mental arithmetic? Then now's the time to pick up your calculator.

A little more interest now? Of course you are – what could be more important than your financial future? Investment might bring to mind dapper older men in well-tailored suits sipping brandy and discussing the stock market, but investing can be for us ordinary folk, too.

With that, let us walk you through the ups and downs of investing so that if you choose to go in, you have your eyes wide open.

Let’s start with the ups:

Your money works harder in the long-term

If you plan to squirrel your money away for longer, you’re likely to get it to work harder by investing in equities. Sometimes called ‘stocks and shares’, equities tend to perform better over the long-term than cash. This means that you have a better chance of getting a return that is higher than inflation rather than leaving money to stagnate in your bank account especially when interest rates are at rock bottom. However, it is important to bear in mind with investments you could end up getting back less than you invest.

Typically people look to invest for five years or longer in order to get the most from their investment. The graph below shows equities have performed above cash over a 20 year period (1995-2015) but please remember past performance is not a guide to future performance.

Cash vs Equities graph

In addition, Barclays’ 2015 Equity Gilt Study, which monitors UK asset performance, suggests that the longer share-based investments are held, the greater the chance they will outperform cash-based investments. Across an 18-year period, there was a 99% chance of shares outperforming cash; this dropped to 68% across a 2-year period.

You have a better chance of beating inflation

You may have heard the term ‘real returns’ before. It effectively means that you are actually making money from your investment as it is higher than inflation. If we take the government’s 2% inflation rate target for 2016, an annual return of 1.6% would mean you are achieving a ‘negative’ real return of 0.4% per year. So you’d effectively be losing money in ‘real’ terms. Make sense? Good.

Don’t put all your eggs in one basket

Ever prepared for sunshine only to find yourself left in the lurch when it rains? Just like the infamously capricious British weather, investments are tricky to predict, so it can be wise to spread your money widely to help prevent loss. 

Diversifying can help spread the risk so that another investment can help go towards countering a poor performer. You can spread the risk by investing in multiple assets. If you don't know your asset from your elbow, you can find out more in our 'Nuts and bolts of investing' article.

“How the heck do you do that?” we hear you ask.

Well, to make this a bit easier, there are things called ‘multi-asset funds’ that effectively do this job for you. Basically, these type of funds spread the risk across different assets such as cash, property, fixed-interest and equities – putting all of your ‘eggs in different baskets’ so to speak, i.e. across different sectors that all represent different risks. That way, you don’t need to take on the burden of diversifying your investment as the fund has gone the extra step and done this for you.

Take a look at the Zurich Horizon Multi Asset funds for more information.

And now the downs:

Investing’s a risky business

It’s one of life’s sad inevitabilities that what goes up must come down – that’s gravity for you. Investment is the same: it’s not an ‘all win’ situation and, like anything else, it has both ups and downs.

The ups and downs of investment – the speed and extent to which it changes – that’s known as volatility and the amount of risk you decide to take often determines the level of volatility your investment will experience.

Be prepared for a rocky ride

For all the statistics you’re given, the harsh reality is there are no guarantees with investing. This makes saving for a specific goal somewhat challenging, as in any one year your investments could plummet. Think about the stock market crash in 2008 when many investors suffered sizeable losses. However, by staying invested for the long haul you have more chance of smooting any losses and giving yourself a chance of a better return on your investment.

Although it can't be used to accurately predict future returns, historical data can provide insight into how a market has reacted to a variety of variables in the past. Bear in mind though, that you can’t assume past activity will reflect future performance.

The question now is: are you ready to take the plunge and start investing to make your money work harder for you?

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Sources:
http://www.telegraph.co.uk/money/special-reports/how-every-type-of-fund-flourished-after-the-financial-crisis/
https://wealth.barclays.com/en_gb/smartinvestor/better-investor/investing-lessons-from-114-years-of-data.html

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