It’s not easy being a young investor – and less so when the economic backdrop is uncertain and markets are jumpy. It’s one thing accepting in advance that the value of your investments might fall – quite another to see this happen in practice.
But the truth is, choppy market conditions – and investment losses – will always be part of the overall investor experience. What matters is overcoming these risks and the bouncebackability of your portfolio, which is where our four principles can help.
So embrace the uncertainty. It’s not going anywhere. Instead, remember always why it is you are investing – the personal goals you want to fulfil – and stay focused on what you can control.
Here are eight additional dos and don’ts you may wish to consider:
1) Start investing sooner rather than later
How much money you're able to consistently invest is one of the biggest factors in achieving your financial goals. And the longer you're invested – or the younger you start – the more you can benefit from compounding, which helps your wealth grow further by building on each layer of return.
For example, invest £250 a month in a globally diversified portfolio of shares and earn – for argument’s sake – an average annual return of 5% on that investment and within a decade you would have £38,591.
Give it 20 years under the same conditions, though, and you would have comfortably more than £100,000. Persevere for 30 years and your capital would grow to £203,8441.
That’s the power of compounding.
2) Keep perspective and control your emotions
Being selective with the information you receive and act upon can involve avoiding people with a perpetual “sky is falling” mindset who might draw you into needlessly realising a loss by panic-selling into a downturn. But it also means being wary of the latest hot-shot investments.
While it may be alluring (who wouldn't want to get rich quick?), jumping on the bandwagon for an individual stock or type of asset that is momentarily in the spotlight is high-risk.
In our experience at Vanguard, we find that the path to long-term investment success is best undertaken with some goals-focused investment planning and paved with a globally diversified and appropriately balanced portfolio of shares and bonds.
3) Remind yourself that time is on your side
The bulk of your career is still ahead of you – so you have relatively more time to ride out adverse market moves.
It’s partly why time in the market is more important than trying to time the market. If it wasn’t, more professional fund managers would beat the market on a consistent basis than the few that actually do2.
But then, the factors that can move markets on any given day and at any given hour are many and unpredictable. Those days when markets rally hard also tend to occur very close to those days when markets fall heavily, our research shows3.
Miss a few of these days and the long-term impact on your investments can be devastating, as the chart below illustrates.
The impact of missing the best 10 trading days of the FTSE All-World index
Source: Factset, Vanguard calculations, based on the FTSE All-World in total-return (gross) GBP terms as of 31 December, 2022
4) Take comfort from the downturn maths
‘Pound cost averaging’ is the idea that you can improve your average entry cost – and, as a result, boost your potential long-term investment returns, by spreading your fund purchases over time. In short, you get more fund units per pound invested when prices are low and vice-versa when prices are higher.
So, when markets are weak, each regular monthly investment in a fund or funds – say, if you invest in an individual savings account (ISA) by direct debit – is done at a progressively cheaper price.
The upshot of buying at cheaper levels is that there’s more potential upside once markets recover – a comforting thought if you’re ever worried about the possibility of markets falling and yet more reason not to worry about trying to time the market.
Therefore, if you start to save when the markets are down, you give yourself a better chance of meeting your goals.
5) Think twice about pausing your ISA or pension contributions
Times are tough and the competition for each single pound you earn is growing as the cost of goods and services rises. But your financial goals are important to you and investing to reach them should not be as discretionary as buying a new TV or sofa.
Life is not just where you are at, but also where you are going. The sooner money is in your account, the more time it has to grow. Stopping contributions altogether will slow your progress, so think twice before you do so. Your future self will thank you for it.
6) Consider investing (more) via direct debit
The beauty of direct-debit investing is that it takes away some of the decision-making. You don’t have to fret about market timing (see tip no. 1) because your investments are made automatically for you, at a point each month of your choosing.
Once you’ve decided on an appropriate mix of investments, these regular investments tick along in the background, potentially benefiting from pound-cost averaging (see tip no. 4).
If you do already have one, do consider raising your regular contributions, if you can, because the more you put away and the earlier you do it, the more your investment wealth could grow.
7) Don’t log onto your investment account all the time
Don’t focus on the value of your portfolio on a single day. Let your investments tick along in the background, much like your direct debt.
On any given day, the market can go up or down. Instead of stressing over your balance, ask yourself, "When will I need this money?" If the money is for a longer-term goal – say 10, 20, or even 30 years – the value of your portfolio today doesn't matter.
8) And don’t forget your emergency cash fund
Everyone should have a contingency cash fund. It should be prioritised over any investments too, because you never know when you might be faced with an unexpected expense or drop in income.
Ideally, it should be easy to access and cover at least three months of your outgoings.
Given the ongoing rise in the cost of goods and services, that figure is probably higher now than used to be – so, depending on your circumstances, it may be worth revisiting.
I hope you find these eight tips useful. Here’s to helping you achieve investment success in years and decades ahead!
1 Vanguard calculations.
2 Dr. Jan-Carl Plagge and James J. Rowley Jr., CFA, The case for low-cost index-fund investing, Vanguard research, March 2022.
3 Vanguard’s analysis of the S&P 500 Index’s performance between 1980 and 2020, for example found that nine of the 20 best trading days occurred in years with negative total returns, while eleven of the 20 worst trading days occurred in years with positive total returns.
Investment risk information:
The value of investments, and the income from them, may fall or rise and investors may get back less than they invested.
Past performance is not a reliable indicator of future results.
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