I wanted to talk to you today about the top 4 investing myths I hear from women, and the reasons I often hear as to why they are not getting started with investing in their financial future. For those of you who have been following us for a while, you may remember that series 2 was entirely about investing. I highly recommend the following podcast episode from series 2:
I shared a photograph on Facebook this week of my Wealthify investment account. Shortly after recording the above episode in series 2 I decided to set up a £25 per month into the Wealthify platform, and the picture I shared this week shows that this investment has grown by around 13% over the last 9-10 months.
But the point of sharing this was not to show the performance of the investment, but rather that anyone can get started with £25. Some investment platforms will let you get started with just £1! The reality is that £25 would probably have been mindlessly spent on coffee or something else that I didn’t necessarily need.
Top 4 Investing Myths
1. Investing is gambling.
The key thing to remember with saving, investing, and speculating is that there is a massive difference between these 3 things. It all comes down to risk and time. Saving is putting money aside, most likely into the bank. The benefits to doing that is you’ll have access to that money fairly easily, and you’ll get interest paid.
Interest for me is not investing. Interest is a small bonus for depositing or lending that money to the bank. They in turn will invest and leverage that money, but for you personally you will just receive a nominal amount of interest. If you’re keeping money in cash, you don’t want the risk of losing any of that capital. So if you put £100 in the bank, you don’t want to risk that it’s not going to be worth £100 when you need to access it. So the benefit of holding money in cash is for short term needs and wants – you plan on spending that money in the short term.
Investing is putting money aside for growth and profit. If you look at the dictionary definition of investing, it says “putting money into schemes with the expectation of achieving a profit.” I actually don’t like the use of the word ‘schemes’, because this can infer perhaps something that isn’t legitimate or is risky. But the word ‘profit’ is really important, because investing is really about putting money into a company that you believe is going to make a profit. This doesn’t mean you have to be an expert, or that you have to try and predict how companies are going to perform – that’s what you use investment specialists for. Even if you’re in what’s called a tracker based investment, there will be some companies which make a profit and some which don’t, and that’s the real risk of investing.
For this reason, investing in individual companies is perceived to be a higher risk. It makes sense: if you buy shares in Apple and the share price goes up, you make a profit. But if the share price goes down, you make a loss. So in order to reduce the investing risk, you want to be thinking about building a basket of investments in more than just one company. So you hedge your bets – Apple shares go down but John Lewis (for example) shares go up.
In order to be prepared for investing, the way to think about it is to consider what level of risk you should or shouldn’t be taking with your money. Another way to think of risk is to think of the word ‘risk’ as ‘uncertainty’. And actually the level of risk that you need to take is probably not even as much as you think. The risk that you take and the return that you get all relate to the amount of time you can invest for and what you’re investing for.
So think about two things – time and purpose. What are you investing for, and how long are you able to invest for? The general rule is that you don’t have at least 5 years to invest then you shouldn’t be investing. However, investing in reality should be for the longer term. You want to have sufficient time to be able to ride out the uncertainties in the stock market.
The myth that investing is gambling is actually really related to ‘speculating’. Speculating is putting your money at risk and hoping that you’ll get a higher return in a short period of time – and this is a gamble. You don’t know whether it will pay off, you’re speculating. You might speculate on something like Bitcoin, for example. Speculating is a very different concept to investing, and it is important to remember that the two are not the same!
It’s when we don’t understand that the difference that we’re prevented from investing in the first place, which is an even bigger risk! Because if you hold all your money in cash you’re going to be subject to inflation risk.
2. Cash is investing
Think of where you store your money as your fridge, freezer, and pantry. Your fridge is your daily access, the things we need on a daily basis. The trade off to have this money easily accessible is security – you know that any money you hold in a UK FCA regulated bank is protected up to £85,000 per person, per institution. So you have that security, and it’s accessible. The fridge is not locked, and you can get in any time. Money held in the bank may go up with interest, but the risk is that you’ll be affected by inflation.
Let’s take a Mars bar for example – in 2000 a Mars bar cost 29p, and in 2020 a Mars bar costs 68p. So imagine how much harder your £1 has had to work in order to hedge against that increase.
Generally speaking, inflation is around 2% each year in the UK, so your £100 sitting in that bank account is reducing by £2 every year. Even with interest, the top rate in the UK right now is around 1.3%, so your money is going up by 1.3% but down by 2%. If you’re going to spend that money in the short term then that’s fine. It’s not going to stay in there long enough to feel the impact of inflation. But if you’re leaving it there for a long time, that’s when you’re going to see the impact of inflation.
That’s the risk of storing money in your fridge. As women, we tend to hold more cash than men. If you look at the statistics of how many cash ISAs women hold compared to men, it’s considerably higher. And that’s because have this fear of investing – we don;t know how to, it’s too risky, or it’s gambling.
Thinking now about the larder, pantry, or kitchen cupboard: any money that you don’t need to access right away you should think about storing in a cupboard. This is like your long term, occasional use, money. This might be things like your holiday or emergency fund – money that you don’t need daily, only occasionally. In a cupboard environment, you want to be exploring some alternative accounts to a bank account. That could be places like cash ISAs, savings accounts, or bonds. You will see a small reward for locking that money away for a short period of time.
Your freezer is the stuff that you might want to access, but think about your deep storage. The stuff that’s buried deep at the back or bottom of the freezer that you’ve probably forgotten about. From an investing perspective, this will be money that you don’t need to have access to for at least 5 years.
So ask yourself what the purpose of each pound in your bank account – does it need to be in your fridge, cupboard, or could it be in the freezer? Thinking about the purpose of the money you have will help you to decide if it needs to be in cash, or whether you should be considering alternatives like investing.
3. Investing is only for the wealthy.
I’m hugely passionate about helping people to manage their own money, and one of the big problems we have right now is that we don’t know how to get started with investing. So we go to see a financial adviser, and if they’re a transactional based adviser, then they don’t really have an interest in helping you to invest because they can’t make a profit from it. Getting financial advice can be costly for the average investor who has maybe £100 per month that they want to invest, so where do you go for that advice?
I’m a huge believer that you don’t always need to seek financial advice to get started. As long as you have a basic level of knowledge and education then you’re perfectly capable to start making these decisions for yourself. So investing is not just for the wealthy – you can get started with just £1.
One of the great thing about women is that there’s lots of research that shows that we are great at sticking to investment decisions. Once we’ve built that knowledge and got started, we’re less likely to be influenced by human biases. For example, women are less likely to follow the herd, so we’re less likely to try and time the markets in comparison to men. It’s not about timing the market, it’s about timing in the market. It’s not just about picking the right time to invest, it’s about picking funds that match your time horizons and your purpose.
So really think about the time you have, and the purpose for saving or investing that money.
4. You need a lump sum to get started.
In some investments this is true, but there are opportunities to invest if you don’t have that lump sum available to get started. The best way to get started is with a regular monthly contribution.
In May 2019 I did a bit of a test by setting up a regular monthly contribution into a well known stocks and shares ISA. The great thing about that is that 9 months later it’s now worth about £250, it’s grown about 13%, and the best thing is that I’d kind of forgotten about it! I got so used to seeing it go out of my account, and I didn’t miss that £25 every month. If I were to continue to leave that to grow, then over a period of time that could build up to a considerable amount of money. The purpose of that money for me is to add to my children’s university funds.
So find a small amount of money that you can afford to invest, whether it’s £1, £10, £25, or £50. Think about committing this amount of money to your future self. I’m a huge believer, as a woman, about having money for yourself in your name so that you’re giving yourself the best opportunity for financial independence. Even if you’re in a happy relationship, I believe that every woman should have an investment in their own name. A stocks and shares ISA is a great way to do this.
So really think about how much you can find that you won’t miss, then the next step is to learn how to get started. The beauty of investing in the stock market is something called pound:cost averaging. So every month that you’re investing in the stock market, you’re buying units. If you’re in a fund – think of a fund like a basket of lots of different company shares – and you’re investing every month, then every month you’re buying a certain amount of units in that fund. If the markets have gone up then you’re buying less for your money because the cost of each unit has gone up. When the markets are coming down, you’re buying more for each £1. So you can reduce your risk by, rather than committing one large amount of money at one time, drip feeding your investment monthly so that you average out the cost of buying into that fund. This is a really great way to get started, because everyone can find that small amount to invest monthly.
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