Metis AM
If you’re confused by the mechanics of the market and how to get the most out of your investments, you’re not alone.
In fact, Money Marketing reports that 61% of UK adults surveyed said investing is “confusing” – up from 44% in 2015.
This lack of understanding is no doubt one of the reasons 37% avoid investing their savings altogether. But with investing often delivering higher returns than saving, being reluctant to invest could stifle your financial potential over the years.
Whether you’re new to it or a seasoned investor, understanding the options for investing and the possible strategies for growing your wealth can be hugely valuable.
Read on to learn how investing works, your options for growing your wealth, and key strategic considerations for mitigating risk.
You can choose from a range of investment categories
The options for investing are vast. There are numerous asset classes to choose from, including:
- Stocks and shares: Also known as “equities”, investing in stocks and shares is effectively purchasing a small piece of a company.
- Funds: These are schemes managed by professionals, consisting of a wide selection of investments.
- Bonds: These are effectively loans to corporations. In return, investors receive a fixed income through interest payments from the company, before receiving their full capital back at maturity.
- Gilts: Also known as “government bonds”, gilts are loans to HM Treasury to fund public spending. Returns are delivered similarly to standard bonds.
Additionally, you could choose to invest in property, cash, commodities such as gold or oil, or even cryptocurrencies, although digital currency is a very high-risk investment unsuitable for most investors.
Typically, an investment “portfolio” – the selection of investments you hold – would be made up of a mixture of these assets. This is called diversifying, which we’ll touch on in more detail later.
Indices provide a benchmark of how stock markets are performing
You may have heard of the FTSE 100, but what is it and what does it actually tell us?
The FTSE 100 is a benchmark index that gauges the stock market performance of the 100 largest companies listed on the London Stock Exchange (LSE). It is generally used as an indicator of UK market trends as they rise and fall.
Other common indices include:
- S&P 500: 500 of the US’s leading companies listed on the stock exchange.
- NASDAQ-100: 100 of the US’s largest, listed, non-financial companies, with a focus on technology and growth companies.
- FTSE All-Share: 600 companies listed on the LSE, aggregated across the FTSE 100, FTSE 250, and FTSE Small Cap indices.
- MSCI Europe: Large and mid-sized companies across Europe’s developed markets.
- Japan TOPIX: All companies listed on the First Section of the Tokyo Stock Exchange.
These benchmarks can help gauge overall market performance in a certain region or sector.
Share values can go down as well as up
A company’s share prices can rise and fall daily, depending on its financial results, the economy, and investor “sentiment”.
Essentially, if a company is expected to perform well, the share price typically goes up. If it performs poorly or is expected to struggle, investors may start selling off shares, reducing their value.
Returns from bonds, on the other hand, generally fluctuate in the opposite direction to interest rates. So, if interest rates fall, bond prices may rise (and vice versa).
As such, it’s important to remember that investing carries a level of risk. There’s no guarantee that you will get back more than you invested. In fact, in some cases, you could make a loss. It’s often worth having an investment strategy in place and seeking professional advice from a financial planner to help you make informed decisions.
4 important investing rules to live by
1. Time in the market often beats timing the market
Because of the volatile nature of the stock market, it’s often recommended that investments be made for the long term rather than looking for “quick wins”.
While share prices fluctuate constantly, historical data shows us that they generally trend upwards over a long period. According to LSE data, the FTSE 100 has risen by around 60% (over 4,000 points) in the past decade – despite significant downswings in 2020.
Rather than investing for the short-term and hoping to exit the market when values are high, it’s often worth staying invested long enough to reap the rewards of long-term growth. This is particularly important to remember during a downswing, when selling your portfolio could mean locking in a loss.
2. Consider whether an investment is suited to your risk appetite
Some investments carry more risk than others. In general, those with a higher risk profile may have the potential to deliver higher returns, but also more significant losses.
For example, returns from bonds are typically said to be lower but more secure, compared to the volatility of the equity markets. Within the stock market, larger, more established companies in the FTSE 100 may offer more stable returns than newer, high-growth companies.
That said, these are generalisations. The risk profile of each investment opportunity will vary.
It’s important to ensure your investment portfolio aligns with your own risk appetite. In short, this means assessing how much risk you’re willing and able to take and the time frame over which you want to invest. Together with your capacity for loss, these elements will inform your risk profile.
A financial planner can help you assess how much risk you’re willing and able to take and select suitable investments for your circumstances.
3. Diversifying your portfolio helps to mitigate the impact of market shocks
One way to help reduce risk is to spread your funds across multiple investments.
By curating a diversified portfolio, you could lessen your vulnerability to sudden market changes. You might choose to divide your funds across various:
- Asset classes (such as equities, bonds, and commodities)
- Sectors (such as financial, technology, and energy)
- Geographical regions (such as the UK, US, and Europe)
- Risk profiles.
That way, if one area, sector, or region suddenly suffers a downswing, only a portion of your portfolio may be impacted.
A financial planner can help you design a diversified investment portfolio tailored to your preferences, goals, and risk appetite.
4. It always helps to invest in line with your goals
For most, investing is a means to an end. If you’re beginning your investment journey, it helps to ask yourself:
- When would I like to decumulate (in other words, cash in) my portfolio, and over what time frame?
- How would I like to use the funds I accumulate through investing?
- What is my motivation for investing?
These simple questions could help you assess how much risk you are willing to take on. They might also help you stay the course if market volatility makes you anxious over the short term.
Get in touch
Investing can be daunting. When you’re putting a portion of your wealth at stake, you want to feel confident you’re making informed decisions.
Whether you’re getting started with investing or looking to manage or expand your existing portfolio, our financial planners could help take the confusion out of investing. We’ll take the time to understand your goals, preferences, and risk appetite and help you create an investment strategy tailored to you.
Email enquiries@metiswealth.co.uk or call 0345 450 5670 today to find out what we can do for you.
Please note
This article is for general information only and does not constitute advice. The information is aimed at individuals only.
All information is correct at the time of writing and is subject to change in the future.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Cryptoassets are not regulated financial products so please be aware that trading them carries a considerable amount of risk for your capital. Cryptocurrencies are also not covered by existing consumer protection laws and are not suitable for the majority of investors.