Great advice if you are new to the area of saving and investing for the long term - or need a reminder on how to succeed.
Young people’s financial habits are frequently in the spotlight and usually for a valid reason; student debt is going up, living costs are an ever-increasing cause for concern, and saving for a home deposit is so daunting, that many young people have given up on the dream of one day making it on the first rung of the property ladder.
Young People and Investing
Young people are different from previous generations – not because of an overwhelming desire to be different – but because so many young people came of age during the 2008 financial slump, which hugely shaped their thinking towards saving and investing compared to other generations.
The Institute for Fiscal Studies reveals individuals in their 20s are earning 5% less than what they should, with those in their 30s 7% worse off, based on pre-financial crash growth rates. It is no wonder that 53% of those in their 20s had no money in a savings account or an ISA between 2014 and 2016. A figure which has risen from 41% in 2008.
While there are many reasons why millennial financial habits may be different from previous generations, there is little reason why it should hold them back from planning for their financial future.
Whilst investing was once reserved for wealthy people with access to a personal financial adviser, improvements in technology have made it a lot easier to get started from just £1.
Here are a few tips on how to become a successful first-time investor for those who are starting out.
1. Begin investing early!
Time is your greatest friend! The earlier people start, the more they can reap the benefits of compound interest over the long term.
What’s compound interest? It is the principle that any interest your money earns, will also earn more interest, and the bigger your balance grows, the bigger those interest payments will get.
For example, if you invest £1000 at 5% you have £1050 at the end of the year. Then next year, that £50 will also earn interest, and although the number looks small, compound interest is one of the key drivers of investment growth over the long term.
2. Diversify your investment portfolio!
The phrase ‘don’t put all your eggs in one basket’ also applies when you are investing.
Make sure you are not only selecting stocks from the same asset class or country.
For example, do not have all your money in United Kingdom stocks only, but make sure you are getting a slither of other global markets as well.
A great way to do this is to invest in an index fund that follows the entire market – giving you exposure to a lot of businesses and companies – versus placing all your money on one stock market.
3. Keep your investing costs down!
The average fees paid by investors in the United Kingdom is 2.6% for management and investment advice. While it may not be a large amount in the short term, over a long period, you could be wasting tens of thousands of pounds of your hard-earned investments.
Look around and make sure all fees are displayed clearly. A good rule is you should never be paying more than 1% of what you are investing as a fee.
4. Set your plan and leave it!
This rule applies to your investments. The very best way to take the emotion out of investing is to automate it. A direct debit from your bank into a saving or investing account is a perfect way to trick yourself into saving even more money, and when it comes to investing it will mean you are less likely to react out fear when faced with market volatility.
5. Keep to your investment plans!
Focus on what you are trying to achieve in the long run when you have a plan in place. If you are saving for retirement but are not planning on retiring in the next 10 years, do not focus on the short term.
What happens now should not really matter to you as you have the benefit of more time.
While it may be very tempting to follow the daily headlines, drown out the daily words of what is happening in the market.
As you will be a more successful investor if you stay the course. Reacting when markets are good, or when markets are down will not help you achieve your long-term goals.
By JJB Mini Money Mentor