There are common misconceptions about investing, but it is increasingly important for a secure financial future.
Data reveals that 52% of women and 37% of men in the UK have never held an investment, with many people put off investing when markets are in decline. While there may be many reasons why individuals are reluctant to invest their money, there are also quite a few myths that need dispelling.
Now isn’t a good time to invest
One of the most common questions we are asked is whether now is a good time to invest. People raise any number of issues when talking to us about timing their investments, including political uncertainty, concern over valuations, and negative stories in the media.
While the tone of media coverage on markets can often be alarming, the best time to invest is often whenever you are ready to. Once you are invested, you benefit from the power of compounding returns.
Brexit will undoubtedly have an impact on the UK economy, but it doesn’t mean that this is a bad time to invest internationally. Any well-run investment portfolio should include exposure to companies from around the world. This allows you to insulate your portfolio from the shocks that can impact individual economies.
Wealth management is only for the very wealthy
Relatively few people consider themselves to be “wealthy”, with surveys suggesting that “wealthy” is applicable to someone with a net worth of around £10 million. However, this is not the case.
Many people have become in need of wealth management services over the past 20 years. A decade-long rise in asset prices, the shift to personal pension schemes, and higher inheritance values have all increased the number of people who now require wealth management.
Cash savings are safer
For much of the past 30 years, banks paid an interest rate above the rate of inflation, meaning that savers could put money away knowing that it would steadily increase in value over time.
Over the past decade, however, cash in the bank has delivered a negative return in real terms. Record low interest rates, combined with persistent inflation, has meant that the real value of cash in a savings account has fallen over the past 10 years.
It’s hard to invest ethically
People are usually concerned that their ethics and investing won’t mix, and that investing will mean compromising their principles.
Ethical considerations can affect the look and feel of your portfolio, including the balance between different company sectors, so you need to think about how to maintain a sensible investment balance. That involves making sure that you are well diversified, not over-exposed to any one type of market risk, and that what you are invested in will deliver on your financial objectives.
My home is my pension
Relying on your home for a pension can come with significant downsides. When you reach retirement age, there are two options to realise the value of your home: equity release, or moving to a smaller property.
If you do rely on your home for your pension, you also need to think about how exactly you will use your home to fund your retirement. You may want to invest the money in order to receive a higher income than is available from a bank account. But if you are prepared to invest your money in retirement, you may want to think about investing ahead of retirement too.
I don’t need to start investing for my retirement
Of all the life events to plan for, you should spend the longest on preparing for retirement. You might plan a wedding for months, spend a year or two preparing for a family, or spend several years saving for a house; preparing effectively for retirement, by contrast, can take decades.
The sooner you start investing for retirement, the more time your investment has to grow. The effect of compounding returns means that investing for retirement is best done sooner rather than later. A return of 5% a year allows you to double the value of an initial investment approximately every 14 years. Even if you haven’t got around to investing until your 30s or 40s, there is still time to allow your money to potentially double in value, or more, before retirement.
I have a pension, so I'm fine
Changes in pension regulation over the past 10 years mean that the majority of people in the UK will be saving for a pension in one form or another. But as any financial adviser will tell you, saving for a pension doesn’t necessarily mean that you are putting away enough for retirement. Estimates of an appropriate pension contribution from The Pensions Policy Institute vary from 14 to 27% of total salary, with many people needing to make additional contributions owing to starting late or not paying enough.
A headline contribution of 27% of salary is a high number for many people. But this is often an outlier, and there are ways to boost your pension. Doing so sooner rather than later can yield significant benefits.
Investing stops at retirement
Investing does not necessarily stop at retirement; we believe that it is beneficial to continue into retirement.
While investment managers can’t help determine your life expectancy, they can design a portfolio to meet a target return, select investments, factor inflation and adjust the asset allocation in line with their view on markets and as your personal circumstances change.
Gemma Woodward is director of responsible Investment at Quilter Cheviot.