There’s been an influx of new investors in the past year.
It turns out that being forced to sit at home and not being able to spend our money on fun things creates the ideal environment for dabbling in the stock market.
There are, of course, other factors at play too.
The launch of modern trading apps, with commission-free trading and the gamification of investing; a bull market, especially for trendy tech stocks; and ultra-low interest rates making a cash deposit seem about as attractive as literally setting fire to your money.
However, not all new investors have stuck at it.
New research from stockbroker Charles Stanley shows that 19% of UK savers gave investing a try and then pulled out of the markets, reverting to the relative safety of cash.
Reasons for retreating from their investing experiments included concerns about market volatility, poor performance records, and a lack of understanding.
The findings were published in a report called Mind the Investment Gap from Charles Stanley Direct. The report highlights the gap between returns available from cash savings and those potentially available from investments. And it highlights the reasons why those who try to invest money aren’t always able to stick it out.
21% of new investors found it too challenging to stay on top of the data and information coming out of their portfolio, to ensure they were making good decisions.
40% said they were concerned about market volatility and felt investing money was too risky. And 32% reported their investments weren’t performing as well as they wanted them too or that they were losing money.
Existing investors also raised concerns about their levels of knowledge.
26% said they don’t understand the different levels of risk and how minimise their chances of losing money, and 51% were worried about making a bad investment decision.
Rob Morgan, Investment Analyst at Charles Stanley Direct, said:
The most important thing is to take a long-term view. Volatility is an inevitable part of investing and it can be very scary when the markets fall. A common mistake is to sell when that happens due to fear which can be the worst thing to do.
Investors must be prepared to hold their nerve and ride the ups and downs – ‘keeping invested’ is usually the best strategy, as historical evidence shows that if you invest for a 10-year period there’s around a 90% chance of beating the return on cash savings when investing in global stock markets.
Respondents to the survey were asked about their confidence in understanding financial terminology when it comes to saving and investing. 55% were not confident, and that included 25% who currently invest money.
26% of investors said they had no idea where to start their journey.
When asked what factors might help improve their confidence in investing, 38% said simplification or removal of jargon, and 34% said more financial education in schools. 20% said that more regular communication from savings and investment providers would help boost their confidence, and 18% wanted education from their employers.
Rob Morgan continues:
When it comes to investing there is a lot of jargon to get your head around, so it can easily seem overwhelming. But this shouldn’t mean that people are put off, particularly as cash returns are so poor at the moment. What is needed is time and confidence to understand some of the terms involved and the levels of risk you want to take.
Looking at the findings in this research, here are a few suggestions from me.
1 – Staying on top of data and information about your portfolio.
This really shouldn’t put you off as an investor. First thing to say is that you shouldn’t be looking at your portfolio, or the data coming from it, too frequently. If investing is your hobby, you should get yourself a new hobby. I would focus on just a handful of numbers.
Looking at the asset allocation of your portfolio; that means how much is invested in the broad investment types, so cash, bonds, equities and property. Keeping this mix at a suitable level is key to managing risks.
Look at the cost of investing, a number you want to keep as low as possible. What are you paying each year in charges?
And look at the net return from your portfolio, relative to a suitable benchmark. Don’t compare your returns to something like the FTSE 100 index, but instead find a meaningful benchmark that relates to your own financial planning goals.
2 – Concerns about market volatility.
Volatility, or the up and down movement in the markets, is the price you pay as an investor for the potential for a higher return than cash.
If you’re not comfortable with market volatility, then it can be said that you have a low tolerance for investment risk, and cash is more likely to be your friend.
That’s not to say that it’s an all or nothing approach. Just adjust your exposure to each asset class accordingly. If you’re nervous about stock market volatility, don’t go all in.
Start small, build up your confidence, and then, in time, increase your exposure.
3 – Performance expectations.
It was interesting to read in this research about some investors dipping their toe in the stock market and then moving back to cash after the investments didn’t perform as expected.
Please don’t measure performance over the short-term. Investors don’t measure performance in the time frame of days, weeks or months, but in years or decades.
If you’re disappointed with how your portfolio is performing in the space of less than a year, then you’re not an investor, you’re a speculator.
4 – Levels of knowledge and education.
We know that investing isn’t taught in schools. There’s a huge and very worrying gap between the money knowledge most have and the money knowledge all need.
Because this stuff isn’t taught in schools, you need to teach yourself. Even if you engage with a professional adviser, you need to educate yourself.
My tip here is to learn to walk before you attempt to run. The investing education you need is not about options trading or crypto currency, but about budgeting, savings, financial protection, and retirement planning. Master the basics, they are all that 99.9% of us really need.
And, above all, keep it simple.
5 – Worrying about making a bad decision.
One way to avoid making bad investment decisions is to stay on the well-trodden path.
If you go off-piste, if you blaze your own trail, or follow others who are attempting to discover a new way, then that worry about making a bad decision will always be at the front of your mind.
Another very effective way to avoid this fear of bad decisions is to link your investment choices to your financial planning goals.
Investing isn’t something that should take place in isolation, or in a bubble. You invest money to achieve your goals in life. Where and how you invest your money should always relate directly to what you need to achieve with that money to realise your goals.