The recent volatile conditions of the British market have put increased pressure on families and individuals in the UK. With the Bank of England’s base rate rising for the thirteenth time in a row, reaching a record-high since 2008 at 5%, and inflation running rampant, households are feeling the crunch.
With these developments in mind, those who are looking to invest their hard-earned savings for the long term are unsure of what to do next, especially in an unpredictable market. We discuss how best to approach your investment strategy for optimal long-term financial growth, learning to combine a healthy risk tolerance with patience and know-how.
Evaluate your risk tolerance
Risk tolerance equates to the level of risk that an investor is willing and able to withstand. Carefully assessing your personal risk tolerance levels will accurately determine the amount you should invest, as well as the type of investments to choose.
Conservative investments tend to be synonymous with income funds, bond funds, or bonds. Assets associated with greater risk tolerance, on the other hand, are equity funds or stocks, amongst others.
Your age, overall investment goals, and total income will affect your level of risk tolerance. Lower-risk investments tend to be safer, of course, but the returns are often relatively low.
Understanding whether you are able to withstand market volatility, aggressive swings in stock prices, black swan events, or sudden interest rate changes will also help determine your risk tolerance. It must be noted that no matter your approach, all investments inherently carry some level of risk.
Ask the professionals
Making informed investments is not a straightforward matter. There are many moving parts, different investment types, strategies, and depending on your personal circumstances, the optimal route will differ from your neighbour.
For this reason, we recommend employing the services of qualified professional advisers. They will help you put together a comprehensive investment plan, helping you reach your financial goals.
The biggest misconception about financial advisers is that they are prohibitively expensive, a service set aside only for the wealthy. However, this is not the case. In addition, the specialist knowledge financial advisers can offer will, in general, pay back that investment in returns many times over.
Understand index funds (S&P 500 and FTSE 100)
Long-term investments and index funds tend to go hand in hand, so it’s important you have a keen understanding of what they are and how they work. For most of us, they rank amongst the best long-term financial strategies available, which is why we are covering these in some detail here.
Many experts talk about the S&P 500 when discussing the state of the stock market, or investment options. The S&P 500 is a tracked performance measure of the 500 most expensive stocks traded on the New York Stock Exchange (NYSE) and Nasdaq.
In the United Kingdom, the S&P 500 equivalent is the FTSE 100, created in 1984. Its simple definition is this: a collection of the largest companies publicly available on the London Stock Exchange, defined by total market capitalisation. For British investors, it is the default option by which to measure portfolio performance.
For individual investors, it is important to note that you cannot directly invest in the FTSE 100. Instead, you may opt to buy shares in the individual companies listed on the LSE, or you can invest with various index funds, which in effect follow the performance of the FTSE 100.
Investing in an index fund is ideally a long-term commitment. This is because the performance can vary significantly depending on the time frame. This past year, the FTSE 100 has underperformed, even missing the latest global stock rally. The average annualised return has been 3.77% for the past five years. When you zoom out and analyse the last decade, however, that number jumps to 12.89%.
Learn to diversify your portfolio
There is not a single ‘best’ investment, whether you are a small investor or a large multinational. This is why learning to diversify your portfolio is one of the best skills you want to develop.
Diversification effectively spreads risk across several asset classes, geographical areas, and industry types. It also protects you from volatility, putting your mind at ease when one asset class fluctuates wildly (e.g. cryptocurrency).
The opposite of diversification is heavy investment in a single stock or industry type. For example, many individuals opted for cryptocurrencies, which did yield high returns, until the collapse of FTX triggered a long-standing slump. Many investors lost a significant amount of money, some including their life savings.
Diversifying your portfolio will help you absorb such events, minimising your overall risk. Of course, the exact diversified portfolio will vary depending on your financial goals and risk tolerance. For younger investors, a higher-risk portfolio makes the most sense, whereas those close to retirement will usually prefer a greater proportion of fixed-income investments.
Do your own research
Our final piece of advice is to always do your own research. Even if you engage the services of a financial adviser, it is important that you take an active role in your investments.
In particular, be careful of the advice you find online. Even if the information is correct, always be aware that your personal circumstances may dictate a different investment approach.