The thought of investing can sometimes be quite daunting because it puts the pressure on having to think about the future, whether it be helping your children with tuition fees and buying their first house or considering retirement. Financial planning in tandem with not knowing what to invest in can be overwhelming, however, it is important to start as early as possible.
Why today is the best day to start
Thanks to medical and social advances, life expectancy has been growing steadily longer over the past 50 years. As of 2020, the average life expectancy for a 40-year-old man is 87 years, while for a woman it increases to 89 years.
However, an ageing population is putting increasing pressure on pension funds, with the result that employers are putting an end to the final salary pension schemes our parents’ generation enjoyed, in favour of defined contribution (DC) schemes, which, as the name suggests, pay out on the basis of what was paid in. The consequence of this change is that your annual income in retirement may be lower than the salary you received while working, and the lifestyle you are able to enjoy may be affected as a result.
This is not surprising when you reflect on the fact that we can now expect to spend almost a quarter of our lives in retirement. The lesson is clear: to enjoy later life without financial pressures impacting your standard of living, you should consider investing now.
The cost of cash
In uncertain times, depositing cash in a savings account can appear to be the safest option for your money. However, in the ongoing era of low interest rates, income from savings is minimal. At the same time, inflation gradually eats away at the real value of your cash. The result is that the interest acquired is unlikely to outpace the rate of inflation and money held in cash or deposited in a savings account is likely to be worth less as the months and years pass.
Instead of lying idle and losing its real value over time, your money could be put to work by being invested in assets such as company equities (shares) or fixed income products such as government or corporate bonds.
Comparison of performance of £100 invested in global equities and cash, 1995-2019 taking inflation into account:
Past performance is not a guarantee of future returns. Source: Refinitiv Datastream
The power of compounding interest
The difference between starting investing today compared to starting to invest in a year’s time can be hugely significant as a result of compound interest. By reinvesting the income or dividends acquired from existing investments, the total value of assets can grow exponentially.
Imagine you have £10,000 to invest, you would like to retire at 65 and investment returns are fixed at 5%. If you were to start investing at age 55, you would see your initial capital grow to the relatively modest sum of £16,470. If, however, you started at age 25, your money would be worth over seven times your original investment at £73,584.
How compounding works over time where returns are fixed at 5%:
| Age invested | |||||
| Time invested | 25 | 35 | 45 | 55 | 65 |
| Initial investment | £10,000 | ||||
| After 10 years | £16,470 | £10,000 | |||
| After 20 years | £27,126 | £16,470 | £10,000 | ||
| After 30 year | £44,677 | £27,126 | £16,470 | £10,000 | |
| Maturity | £73,584 | £44,677 | £27,126 | £16,470 | £10,000 |
Forecasts are not a reliable indicator of future performance.
Lessons of investing
For an inexperienced investor, monitoring your investments can be stressful, particularly when a lot of jargon is added, performances are erratic and you don’t know the reason for it. Here are some key points to know about investing.
Volatility is not evil – Short-term movement up and down are a normal part of market behaviour. Over a longer time-horizon, these small spikes in volatility tend to smooth out. These movements can actually provide investment opportunities for experienced professionals to buy low and sell high.
Don’t let emotions get the better of you – Buy and hold strategies tend to provide the most reliable returns and trying to time the market can often do more damage than good. Therefore, it is key to not let emotions dictate investment decisions. When given a ‘hot tip’ or confronted by a sudden drop in the value of an asset we are invested in, most of us will be tempted to act. This is entirely natural, but unless we have clear insight into the underlying causes, it is rarely a sensible approach.
Diversification, diversification, diversification – Balancing risk and reward should be central to your investment strategy and diversification is the best way of positioning yourself to benefit from market gains while minimising your overall risk. In a diversified portfolio a range of different asset types are combined. Assets are deliberately selected whose performance tends to be affected by different factors and which, as a result, tend to behave differently (we say their behaviour is ‘uncorrelated’). Portfolios can be diversified by either asset classes, geography or sectors.
What role does Quilter Cheviot play in this?
Quilter Cheviot provides discretionary investment management which means we deal with day-to-day investment decisions made on your behalf, within agreed guidelines, by an investment professional.
A reputable discretionary investment manager will tailor an investment strategy to fit your objectives. They will continuously monitor your investment portfolio and make adjustments in response to the market, economic changes, or changes in your circumstances, with all decisions underpinned by expert research.
We can help set financial goals as well as go through the important factors to consider when investing. These include calculating risk appetite, how long your money should be invested and whether you want growth or income, suitable for all life stages.
To find out more about our investment services and how we may be able to help you, please get in touch to begin your investment journey.