Developing a healthy investing habit
With the new tax year just starting, what better time to reflect on our habits, and give our investments the best chance of success in 2017/18?
One of the keys to success in many areas is having good habits. When we first enter the world of work (especially after university) one of the hardest things is getting up, out, and arriving on time! However we practice and build up the habit to the point that we just do it without thinking. It is important to build up habits to do with our financial planning too. Once you’ve sorted out your emergency fund the next area is investing for the future.
Do you have an investment habit?
I don’t know about you, but living life is much more interesting than planning for the future. It takes effort to work out how much cash you have to spare, find a place to invest it, and then do it. Sometimes by the time we get around to it we’ve already spent the money we had earmarked.
It’s generally much easier to work out how much money you have spare on a monthly basis (our income and spending tends to be fairly similar over the year). Having identified how much you have to invest each month setting up a direct debit can make this happen automatically. You will be able to focus on the things that matter now, knowing that your savings habit has started preparing for your financial future.
Deciding how much you can afford to invest each month, and then setting up a direct debit makes it easy to develop an investing habit.
Is now the right time to invest?
In the year 2000 Ronan Keating told us that life is a rollercoaster and reminded us that you’ve got to ride it. Investments are a bit like this. They go up and they go down, but over the longer term the trend tends to be up. In a perfect world we would invest all our money at the bottom of the rollercoaster, but unfortunately, without a time machine, we can’t do this. And we also can’t be sure when the market has reached a peak. So what can we do?
Investing on a monthly basis can help get you somewhere between the two. It’s like being an elite athlete. You know that you have a good chance of beating the field in your sport, but you are still only human. You might have an off day, catch flu, or get injured. If you only ever entered one race per season you might or might not win. You will either have a good day, or a bad day. If you compete for the whole season you stand a much greater chance of winning.
Investing on a monthly basis also reduces your chances of investing all of your money at the top of the market.
Time to grow
Perhaps the greatest benefit of developing a regular investing habit is that the money you invest now has longer to grow. The power of compounding means that £1 saved today should be worth much more in the long term.
The chart opposite shows the power of investing £250 per month for 10 years, and then letting it accumulate for another 10 years, assuming a steady growth rate of 5%.
Important note: the value of investments can fall as well as rise, and you may get back less that you originally invested.
Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.
How to get started
Investing for the first time can seem daunting. Markets go up and down, and there are literally hundreds of opportunities out there to choose from. Making the right decisions for the long term can be tricky. So where to start?
One of the first decisions you’ll need to make is whether you want to manage your own investment portfolio – and there are a number of online platforms where you can do this – or whether you’d rather let a professional do it for you. At EQ, we specialise in making investing easy by offering the latter kind of service… so we’re clearly a little biased!
If you are thinking about managing your own portfolio online, it might be worth checking out our online calculator to see whether you really will end up saving you money by ‘doing it yourself’, once you’ve accounted for the time it takes to do this properly.
If you’re looking for a straightforward and cost-effective way to have a team of investment professionals do the heavy lifting for you, why not check our our Simply EQ online and telephone investment service?