Please be aware that any form of stock market investment can go up and down over time. You may want to consider advice from a qualified financial advisor before opening a Stocks and Shares ISA.
Most of us would like to have more money, am I correct? It’s true that money doesn’t buy happiness but it certainly makes life a lot more palatable.
But there are only a limited number of hours in the day to work to earn money. Making the most of the money that you do have and making that money work hard for you is one of the easiest ways to grow your wealth. Which is why I want to talk about investing.
Is investing for everyone?
When I met my husband he had no investments and we had quite different perspectives when it came to our finances. We still do differ in the way we view certain things relating to our household finances which is often the source of a monthly, healthy debate! However, I am happy to say that he is now on the investing journey with me.
Investing isn’t only the domain of the super rich or those who understand stock markets. I’d like to banish some of the common myths and worries around investing and talk about why investing in Stocks and Shares ISAs is a great option to consider if you want your money to really work for you.
Ups and downs
The first month that we set up a Stocks and Shares ISA for my husband, he would text me daily. He had his ISA balance accessible via an app, and I joke not, he would message me to let me know that the balance had gone down a few pounds. There was a tangible worry in those texts.
Similarly, I would get jubilant texts when it hit milestone increases! Much as I would tell him to forget about the investment and check the app at most once a month, he couldn’t!
Now if you don’t want to lose any money, investing in the stock market probably isn’t for you. It isn’t a short-term game and you need to be prepared that the value of your investments can go down as well as up over time.
There will always be market downturns but if you look at history, stock market growth trends upward.
If you decide to invest in the stock market, you will do best to avoid being a helicopter investor with constant checking and not worry about the day to day ups and downs!
Fear and patience
Fear of a drop in the market affects all investors, not just those new to investing. Market dips are inevitable and are a fact of life when it comes to investing. What is important is to not react to them and panic sell.
If you are worried about investing because you think you will be too reactive to market downturns, you just need to keep calm and focus on the long term plan….
Time frame for your money goals
What are your goals? What do you want to spend your money on in the future? And when?
A ‘wealth plan’ is a fantastic way to plan how to achieve what you want with your wealth, and when you want to achieve distinct goals.
If you want money accessible for a new car you know you need next year, you are better off having your money in a cash account. This way you know with certainty how much money you will have at that point in time.
For those longer-term goals – buying a home, paying for children’s private school/university fees, early retirement – investing your money in an ISA and letting it grow free of tax is a great option. By investing now, topping up with regular contributions and leaving your investment where it is, the power of compound interest will come in to effect, magnifying the amount that your investment is worth.
Compound interest is where interest is made on the interest each year, as well as the initial sum. If interest is re-invested, this means that in the second year, money is earned on both the original amount saved and that interest. This happens year after year if the original amount and the interest are left in the ISA.
A rule of thumb is that a 7 per cent return for 10 years doubles the original money. If it is then left for a further 10 years at 7 per cent, it doubles again.
It’s easy to see with these figures why investing in a Stocks and Shares ISA is more attractive over the long term than leaving your money in a cash account earning a lower interest rate. But you have got to be prepared to leave it for an extended period to benefit the most from compounding.
Paying off our mortgage is my husband’s fixation and he’d have done it by now through overpayments if we hadn’t had those monthly head to heads on what to do with our money! I can’t understand why we would pay down cheap debt instead of investing that money to GROW at a better rate.
So, we’ve done a bit of both as a compromise.
If you have bad debts, and by bad debts I mean credit card debts with high interest rates, you absolutely should be working towards clearing those. Investing should not be something you consider until you have your debts under control; remember that whilst stock market gains are appealing, the value of your investments can fall.
However, with mortgages at historically low prices, you do not have to wait until you have paid off your mortgage to start investing. If you over-pay on your mortgage repayments, think about whether you could put this additional money to an alternate use by investing it. Are you on the best mortgage rate available?
Why not compare the market to see what is available; if you secure a better deal with lower rates, think about investing the difference each month as a way of making that saving work for you to grow your wealth.
Do you think you could make your investment grow at more than the rate you are paying on your mortgage? We do.
But I know nothing about financial markets?
You don’t need to know much about financial markets to invest in a Stocks and Shares ISA. You really don’t.
I have a background which enables me to understand the difference between equities and bonds and have a view on whether it makes sense to invest in different markets across the world and why. Have my investments done better than the average person who has just picked a risk profile when setting up their ISA and has gone with the suggested funds? Probably not…
You can set up a Stocks and Shares ISA online answering questions on how much you’d like to invest and for how long, as well as questions that measure your risk profile and what would you like to achieve. Based on this, you will be presented with a portfolio (think of a basket) of funds which invest in different shares, bonds and possibly cash to suit your profile.
You’ve done the important work there – by answering those questions honestly, your ISA will be constructed to best suit you. You can then sit back and let the fund managers do their thing and work to grow your money.
But I have a Cash ISA so I am investing?
Cash ISAs have the same tax benefits as Stocks and Shares ISAs; any money invested will grow at the given rate of interest, free of tax. However, many old ISAs now pay seriously low interest rates and even the best of the bunch pays barely over 1.2%. With the rate of inflation currently at 2.3% (March 2018), your savings aren’t growing at all in real terms and are actually getting eroded by inflation.
Over the long term, the stock market returns are significantly better than returns on cash and after factoring in inflation, you do actually see real growth.
However, in spite of the relatively minimal return you get on your money, with a Cash ISA you do know that your money will continue to grow in line with the interest rate. Unlike the ups and downs of the stock market. The certainty of knowing how much cash you will have at a given point in the future is the trade-off for potentially higher, inflation-withstanding growth.
Unless you need a defined amount of cash in the short term, this is something to have a good think about.
Getting started with ISA investing
Each tax year, starting 6th April, you can take advantage of an ISA allowance that sets the maximum amount you can save tax-free. Getting started today means taking advantage of this year’s allowance; once the deadline is gone, the opportunity is gone. It is a use it or lose it allowance.
You can also think about ISA allowances in relation to your family. Is your spouse or partner making use of their allowance? Are your children eligible for a Junior ISA and can contributions be made there? For a couple with two children, the current total ISA allowance available to the family is £48,256. This is £20,000 for each adult plus £4,128 of Junior ISA allowance per child.
I hope I’ve made you have a better think about any blocks you have which may be stopping you investing. Have a read of some of the interviews in my ‘Investing : a woman’s perspective’ series for some real-life stories of how these women have overcome their own blocks and started investing.