This article has been submitted by Magenta Financial Planning
For some reason, investing is a topic that people find mysterious and intimidating— and this leads to some beliefs that seem strange to us. We don’t think investing is mysterious. In fact, we think it’s a lot simpler than people make it out to be. Here are nine things that we often hear from people we meet— and our responses.
- “You have to be rich to invest”
Wrong! Investing is a great way to increase your wealth over the long term, because the returns from shares and bonds are likely to outpace inflation, leading to an increase in your buying power over time. But you don’t have to be rich when you start. In fact, you can open an investment account with as little as £1 per month. Even if you start small, start early.
- “Investing is boring”
We don’t think investing is boring. To us, the idea of thousands of shares and bonds whose prices are moving in real time as investors react to economic, political and corporate news flow is fascinating. But if you don’t share our interest, that’s fine — because Magenta can help you choose investments and then you can leave us to manage them while you do something more interesting.
- “Investing is like gambling”
With gambling, you either win money or you lose some (or all, more likely). If you invest in a single share or bond, and the value of that share or bond falls to zero, you lose all of your investment.
But if you diversify your investment across many different shares or bonds, the likelihood of losing all of your “stake” falls dramatically. That’s because it’s extremely unlikely that the value of all of your shares and bonds will simultaneously fall to zero. Although values fall from time to time, over the long term investment markets tend to go up, not down. And the longer you leave your investment, the more likely you are to see a significant gain. That’s not gambling, that’s common sense.
- “Investing is complicated”
Some investments do sound terribly complex. Why is that? Could it be so that investment providers can charge you a lot of money for doing things they don’t explain properly? We believe that successful investing doesn’t have to be complicated — or expensive. That’s why we look after straightforward portfolios based on investors’ goals, and review these regularly to ensure they are still on target.
- “I won’t be able to access my money”
There may be some investments that will lock your money away, but not at Magenta. Although we’d always recommend taking a long-term view, you can sell or withdraw funds at any time if you need to. When you sell, it will take a few days for the money to arrive in your account, and the amount you get back will depend on market conditions. But your money isn’t locked away — it’s available whenever you need it.
- “Index funds are run by computers”
This is a popular misconception. An index fund tracks the performance of a given index e.g. the FTSE 100. The reality is that an index fund run by a computer would have trouble tracking its index accurately. In the real world, companies merge, index constituents change, dividends get paid and human beings need to make lots of judgements to ensure that index funds react to all of these events efficiently. So good index funds are run by experienced human beings, not computers.
- “You have to watch the markets every day”
Well, we’re not going to stop you, but there really isn’t any need to watch the markets every day. In fact, if you watch too closely you’re more likely to take action — and that action may not add value to your portfolio, although it’s certain to rack up your investment costs. We believe investors give themselves the best chance of success if they define their goals, select a high-quality, low-cost portfolio, then tune out the noise and stick to their plans.
- “It’s better to keep your money in the bank — that way you know what return you’ll get”
Ten years ago, interest rates were over 5%. In 1990 they were over 15%. And now they’re virtually zero. Where will they be in a year, or in two, three or five years? Nobody knows. So you don’t actually know what return you will get in the bank, but it’s likely to be lower than the return you could get from equities and bonds over the long run. And if it is lower than the rate of inflation, this leaves you with less purchasing power in the future.
- “Investing is something old people do”
No! Investing when you’re young is a great way to increase your chances of long-term financial security. Yes, there might be lots of more interesting things to do when you’re in your twenties. But if you take the time to set up a disciplined investment plan to harness the power of compound interest, your older self is likely to thank you down the line!
Magenta Financial Planning is always happy to provide basic financial information to help people to get a better handle on their finances and the possible solutions available to them to improve their future security and happiness.