Monday, 24 June 2019
There are lots of things to consider when investing - should you use passive or active funds, how should you split your money between equities and bonds, should you save into an ISA or pension etc etc. However, to make investing work for you to need to be able to ride out the occasional stockmarket crash without panicking and selling. If you sell your funds AFTER a stockmarket crash it is guaranteed that investing will end up losing you money. It is crucial to hold your nerve, which will allow you to benefit from the long term growth that the financial markets can deliver.
Therefore, the single most important thing to work out before investing is this:
How much could you tolerate seeing your investments fall in value, temporarily, without panicking and moving your investments into cash?
This can be quite hard to answer in advance. You might think that in theory you could tolerate, say, a 25% fall in the value of your investments, temporarily, but when you actually see your £100,000 turn into £75,000 it is a different matter. It can be very unnerving to lose that kind of money, especially as the media will be full of stories of doom and gloom.
The more of your portfolio that you have invested in the equity markets, the greater your long term investment growth is likely to be. However, there's no point putting 100% in equities if you are going to panic when your portfolio drops by 20%, which it will certainly do every few years if you take that kind of risk. All you will do is continually invest money, lose some of it, panic, take your money out, then invest again later and repeat the process.
So, have a good long think about it. Once you have decided on the maximum temporary loss that you could tolerate without getting panicked out of the markets then get advice on what that means for your investment portfolio.
For example, if you think you could definitely withstand a 20% fall in your investment portfolio without getting cold feet then a portfolio made up of 40% equities and 60% bonds might be suitable. On the other hand, if you think you could withstand a 40% fall without panicking then a portfolio made up of 80% equities and 20% bonds might be fine. These are very rough figures and this is not meant as investment advice.
In summary then, the most important thing to consider when deciding on an investment portfolio is what the worst case scenario might look like, and being sure that you could tolerate it. Get in touch for advice on your investment portfolio or any other financial issues.