Is investing too risky for you?

Is investing too risky for you?

One of the simplest ways to save money is to open a savings account. You set up an automatic payment to send money to your savings account every month, or just do a transfer when you have the extra cash. It might only pay a low rate of interest, but hey, it’s better than no interest and you know exactly what you’re getting. Plus, it’s not just about the interest. It’s the peace of mind. Having money there if there’s an emergency.

You definitely don’t want to put your hard earned cash at risk, where reckless businesses hoover it up and make stupid decisions with your money, do you? No, it’s better where you can see it, nice and safe in a savings account.

I felt certain that I would never “gamble” on the stock market. I’d read plenty of people pooh-poohing my approach, and that was fine. If they want to lose money, go ahead and lose it. I worked too hard to risk my cash.

I don’t know exactly why I’m writing this. If anyone had deliberately tried to change my mind about investing in the stock market, I would have put up barriers instantly. It was an off the cuff comment, not aimed at me, not aimed at anyone in fact, that sowed the seed of a new way of thinking.

“You wouldn’t want your pension invested in cash deposits, so why would you want all your savings in cash. It just doesn’t make any sense.”

My eyes narrowed and I’m pretty sure I cocked my head to the side (I tend to do this when I’m thinking about something). I absolutely wouldn’t want my pension languishing in a pitiful savings account; would you? Would you be happy to see meagre returns, whilst your colleagues took the rough with the smooth, but were more than likely going to come out with a pension pot significantly bigger than yours?

It took another 7 months after that to make my first investment. I read and read and read and in the end, I still didn’t feel like I knew what I was doing but I just went for it. Maybe it’s a foolish approach, but I feel like I’ve been more of a fool to miss out on years of growth.

See, here’s the thing. Banks and greedy and businesses are greedy.

Banks want to pay you as little interest as possible to make money from you.

Businesses want to make profits to get bigger and more successful, and the people in those businesses want to earn more money. An output of this is that the value of your shares goes up. So you make money from them.

Banks want you to save as much with them as possible so they can do more lending and make more money from you. They may pay a smidge more to get your custom, but their primary concern is their margin.

Businesses want you to invest in them so they have more funds available to grow faster. They pay dividends to attract new investors and keep existing investors, which keeps the value of shares high, so you benefit in 2 ways (increasing value and dividend payments).

Businesses can lose money. They can make wrong decisions or they might deceive people in an attempt to get competitive advantage, which ultimately comes back to bite them. I’m not denying that. But no business wants to lose money. Everyone within a business is paid to make that business a success, and therefore to make that business profitable.

In a bank, everyone is paid to extract as much value out of customers as possible. They might do this by investing a lot in customer service to leave you with a rosy glow so that you come back for more of their services, or by offering a no frills approach with minimal overheads.

Our government wants your funds to be protected if a bank goes under, and that’s a brilliant benefit of cash savings in the UK.

Governments around the world want their economies to be strong. Strong businesses mean more people employed and paying taxes and more profits to cream taxes from too. So they change their policies to try to create an environment where businesses can thrive.

Not all businesses will do well and some will fail. But on the whole, everyone is rooting for businesses to succeed. Unless you think capitalism is suddenly about to fall out of favour, it doesn’t make sense to dismiss investing on the fear of losing money*. It doesn’t make sense to keep all your cash in an account where paying you a good return isn’t in the banks’ interests.

You don’t have to put your money directly with individual companies. In fact, I wouldn’t suggest this. Instead their are hundreds, maybe thousands, of funds out there that spread your investment across a lot of companies. So if a company goes under, you don’t suddenly lose a big chunk of your investment.

Maybe your mind can’t be changed by someone deliberately trying to persuade you of the benefits of investing. Or maybe you’re not as foolish as I was….

*I guess I should caveat this with the ever frightening warning that the value of your investments can go down as well as up. Yes, they can go down a lot. But they can also go up a lot too. Over the last 18 months, I’ve seen my investments fluctuate. And, I’m obviously not a financial advisor, these are simply my opinions.

Have you always avoided investing, have you started to change your mind, or has it always seemed like the obvious thing to do to you? What advice would you give people who are worried about losing money by investing?

6 thoughts on “Is investing too risky for you?

  1. Before investing, you have to have a financial goal first. You have to decide what you want. 100k in 1 year? 1 million in 5 years? 5 million in 10 years? Then you assess your risk tolerance. If you plan to invest in the stock market without enough technical knowledge, it is better to step back because the stock market is risky especially when you’re financial goal is within 5 years. But if time is in your favor (like 10, 15 20 years), then the risk will be reduced because you have time to ride the ups and downs of the stock market. As for me, I’ve been engaged in the Phil stock market for a year now. Honestly, I don’t have hundreds of thousands yet. But I am happy with the result so far. And the most important thing I can share is that engage only in the stock market with the money you can afford to lose and invest only on the industry or company that you have knowledge about.

    1. I have to admit I don’t have a specific goal yet in terms of what value I’m targeting. What I do know is I don’t intend to touch my investments for 20+ years! Thanks for sharing your tips 🙂

  2. I’m about to dip my toe in investing in the new year. Scary prospect for a novice, but I do like the gentleman’s advice above about having a long term goal. Mine is retirement in 15 years so I have a bar to set and reach I suppose already. Plenty of reading to do between now and New Year for me the!

    1. I remember feeling this way and after 18 months, I am still learning. My investment growth isn’t astronomical, but it does far surpass the amount I could have earned on cash savings.

  3. The thing that holds me back from investing is that I just don’t understand it. When I read blogs that are by people who advocate investing, they always say that you will get a 7% rate each year, but if it’s essentially a gamble, how are you guaranteed it will be that much? Could you not lose all of your money?

    1. I totally understand your reluctance and it isn’t a guarantee. I’ve seen blogs quoting 7%, 10% and even 12%. I think the stockmarket has averaged 10% annually since 1928, but I’m really really cautious, so I base my figures on 4%. I hope it will be closer to 7%, 10% or preferably 12% but I don’t bank on it.

      One of the funds I invest in has shares in HSBC (5.7%), Shell (3.98%), BP (3.91%), Glaxosmithkline (3.29%), Astrazeneca (2.37%) and Vodafone (2.33%). They take up 22% of the fund, with the other 78% split across tens of other companies.

      If you invested £100 in HSBC and the share price tumbled, you could easily lose money. If HSBC went under (unlikely as they’re so huge) you’d lose your £100 completely.

      If you invest £100 in a fund like the one above, £5.70 of your investment is with HSBC, so if HSBC went under, you’d lose £5.70 of your investment. HSBC (and the others) are in the top 100 companies on the UK stock exchange. Some of them do have bad months and years, but the chances of going under are slim and if one or two did, not all of your investment is tied up in them.

      Starting small means you might just start with a UK fund and a US fund. This reduces your risk even more, because if the UK has a bad year but the US has a good year, at least half of your investment will do well. As you have more money, you can spread you money out further over Asia, Europe, etc.

      I also drip feed my investments. Say you had £100k (I don’t, by the way, but lets do some wishful thinking!), if you invested it all on the same day and the market nosedived tomorrow, your 100k obviously falls and it can take a long time to recover. However, if you invested £5,000 per month for 20 months, you might have bought at some high points and some low points, so this smooths the risk too.

      If you go to td direct investing > Investments > Investment funds > Investment funds > Fund selector, this is a good tool for lookin at how loads of different funds have performed over the short medium and long term. Its bamboozling at first but little by little, this made me feel more comfortable about investing.

      Right now, the best performing fund I have has grown by 49% over 2 years and the worst performing has lost 9%. If I’d just invested in that one worst performing, my investment would be down if I sold today.

      Hope this helps 🙂

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