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The reluctant investor: eight things to change your mind

Tahmina Mannan
Written By:
Tahmina Mannan

The peaks and troughs can make even the hardiest of investors nervous, but sitting on cash is counterproductive. Here’s why…

A recent report from unbiased.co.uk found that the majority of 18-34 year olds who want to invest their money end up backing out at the last minute because they lack confidence in the markets. Instead they dump their cash into savings accounts.

However, with interest rates so low and inflation high, cash will offer little opportunity for savers to grow their money.

Here, a group of industry experts provide top tips for reluctant investors:

Cash is not king

Cash, unfortunately, as safe as it may seem, is not king when it comes to your portfolio.

Martin Tilley, director of technical services at Dentons Pension Management, says investment is putting money into an asset with the expectation of it growing, usually over the long-term future: “Cash is not king, particularly in the current environment. Usually cash rates, particularly if held in a taxable environment (outside of an ISA or pension), are lower than the current rates of inflation.

“With the economic environment as it is, the effects of quantitative easing are likely to see cash rates remain low for some considerable time and whilst inflation appears well controlled at the current time, the current rates as measured by RPI or CPI are eating away at the real value of cash savings. Over longer periods, this will have a compounding effect.”

Tilley recommends ‘real Assets’ which can include investing in shares or property, both of which currently have income (dividends and rents) above the cash returns available so investors are already ahead of the game.

Different shares and markets will have different yield characteristics and similarly rents will vary depending on type of property and location.

Remember the power of dividends

Tom Stevenson, investment director at Fidelity, says: “Some companies pay a slice of their profits twice a year to investors. These dividends can be spent as they are paid or reinvested back into the market.

“The power of compounding this income is what makes equity investments so attractive and over time dividend income provides the lion’s share of the total return from an investment. The FTSE 100 index is at roughly the same level it was at in 1999 but if you’d put money in shares and reinvested the dividends the total return over that period would have been significant.”

Be risk aware and mitigate accordingly

Dominic Thomas of Solomons Financial Planning says younger investors, in theory, should have a very long term investment horizon and so ought to be more able to take risk today.

However they are also more are likely to have more short-medium term goals such as a deposit for a property, clearing a mortgage or perhaps having a family.

He says all of these situations are likely drains on resources, putting obvious pressures on income but portfolios can be arranged having taken these issues into consideration.

Thomas says knowing yourself, your attitudes to risk and how you will fare in peaks and the troughs of a market could be the difference between good profitable investments or a loss of huge sums because you pulled too early or invested somewhere that had little risk and no returns.

“There will be peaks and troughs in any investment. So you need to have a realistic time frame set during which time the investment will not need to be touched.

“Risk is greatest where single investments are made. So by spreading the investment over a number of assets the risk of one company failing badly is mitigated by holding a raft of others.”


Time in the markets, not timing the markets

Recent data from the Association of Investment Companies suggests that, in the absence of a crystal ball, it is time in the market that is key to investor returns.

Given the difficulties of timing the market, the AIC report showed that it is actually better to be in the market than not at all.

An investment in the average investment company, even at the top of the market at the end of December 1999, would have more than doubled over the last 13 and half years to 31 May 2013.

A £100 investment in the average investment company at around the time of the market’s all time high at the end of December 1999 has grown to £226 by 31 May 2013, and the UK Growth sector has fared even better, returning £272.

The experts say that investment decisions should be made after you’ve identified your goals, cleared off debt and have sufficient emergency reserves and cash for planned spending.

Ignore what your mates are investing in…

Phillippa Gee, from Phillippa Gee investments adds:
“Ignore what your friends or family invest in. The sooner you work out what you need and what investments suit you, the better.

“You don’t need to wait until you have accumulated a fortune. Most investments will take a minimum monthly investment of £25-£50, so you can get started sooner.

“Even when you have made the investment you need to keep reviewing it. Most investors find it hard to know when to sell their holdings and even some fund managers don’t find it easy.”

Don’t let the taxman take it

James Corcoran, senior adviser at Courtiers Wealth Management, adds to the above:

“Don’t pay the tax man anymore than you have to!

“By keeping money in savings accounts you are not only earning historically low levels of interest, but also basic rate tax payers are paying out 20% of that to the taxman. By using tax efficient products you can ensure you keep the money in your coffers rather than HMRCs, plus by making personal pension contributions basic rate tax payers can get an additional 20% from HMRC.

“So for every £80 you put in, they will give you an additional £20. Many employers will also match your pension contribution to a certain level as well so it is worth speaking to your employer to see what is available.”

Use the free tools

Stuart Welch, CEO of TD Direct Investing, said: “When considering investing, it is important to make informed decisions that you’re comfortable with and don’t forget that it’s good to think about investment options early on to ensure you have enough for a happy retirement:

“For those considering a DIY investing route, and even those who aren’t, don’t forget there are plenty of free tools and resources available, to enable you to make more informed investment decisions. If you want to find out more before making your first investment decisions, why not practice with a dummy account, which most providers offer. “

If in doubt seek advice

Denton’s Tilley adds: “With the internet, a plethora of resources are available to investigate potential investments. However, even with all this data, the old adage of “a little knowledge is dangerous” applies. If you are not a sophisticated or experienced investor, taking professional advice is always the appropriate action.”