Thinking about investing can be daunting.
We worry about fees and we worry about losing money.
According to our recent BlackRock Global Investor Pulse Survey, most of us still hold a large
proportion of our wealth in cash and many of us feel less confident about our financial
decision-making than we did even just one year ago.
At the same time, more and more of us are saving for retirement.
But, in the UK’s rapidly-evolving pension landscape, how many of us are really on track
to achieve financial security in old age?
What does this even involve?
And why are we so ill at ease with financial planning, when, like with the dentist, the
longer you put it off the worse it could get.
One of the key challenges people face is how to imagine a retirement which may be decades
away.
Each generation is living longer and many of us can expect to live beyond 100.
However, many dramatically underestimate just how long they might be around for.
In an ideal world, we would like 39 years to save for retirement.
In the real world, many of us put it off until well into our 30s or even 40s, while around
one in five never start saving at all.
Most of us typically save around 7% of our annual salary for retirement.
But even with this amount might not be enough to achieve the income we would like in retirement.
How to Invest When it comes to financial priorities, our
instinct is to feather our own nests.
Saving in general, saving towards retirement and growing wealth are three of the top five
financial priorities.
Yet despite this mix of short-term and long-term financial goals, we are still reluctant to
invest more of our money.
Around two-thirds of all personal savings and investments remain stuck in cash, which
is not surprising as we have fewer doubts or concerns when opting for cash.
However, given the current and low interest rates from cash and bonds, saving and investing
for particular goals has become more challenging than ever before.
Of course, moving out of cash means taking on more risk.
For those looking to invest or for those who are doing so already, the tendency to invest
closer to home and in areas we might know well seems intuitive, however, the benefits
from diversifying, or spreading, investments away from home can far outweigh the risks.
Many studies have shown that the allocation of investments across multiple assets is more
important than choosing which specific companies you buy one simple starting point for diversifying
or spreading your investments could be by looking at well-known markets such as the
FTSE 100 or the S&P 500 Index.
These markets give you exposure to some of the largest U.K. and US companies, as measured
by their market value.
Using an exchange traded fund, (a fund which trades on a stock exchange and can be bought
or sold through the day like any stock) to invest enables you to invest in the broad
market index with one simple trade rather than having to buy each of the individual
stocks which make up the index.
Using this principle you can look to further diversify your investments across different
markets, geographies, sectors and assets including shares, bonds, property shares and even commodities
such as gold.
Within stocks you have a choice of broad regions and single countries or sectors, different
investment approaches or company sizes.
When investing across assets it is important to understand the benefits and additional
risks this brings.
Stock markets in general tend to increase in value when the economic outlook is favourable,
but tend to decline when the economic news is less positive.
Meanwhile, bonds have historically reacted in an opposite manner, tending to decline
in value during favourable economic conditions, but rising in value when the economy takes
a downward turn.
When investing overseas, it is important to note that you will also be exposed to the
fluctuations of different currencies.
The decision and what proportion to invest across different assets will depend on your
objectives, time horizon and your appetite for risk.