Investing in the stock market

The human side of investing

At a glance

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  Every investor has to deal with the ups and downs of investing.

  We’re emotional beings by nature – we’re thrilled when the market rises, but can panic when it falls.

  Holding your nerve through the downturns can be hard to stomach. But history teaches us that markets have risen in the long term.

  Here are some of the biggest falls in the UK stock market since 1985 and how long it took to recover. We’ve assumed you’d have invested at the highest point before it began to fall.

  Scroll across to see the full chart.

  Past performance is not a guide to future returns. Source: Thomson Reuters Eikon, 13/04/2023. Where no figures are shown data is unavailable.

  Clearly, the tough times don’t last forever. It’s essential to think long term and stay resilient, especially if markets feel uncertain.

  Here are some investing dos and don’ts to bear in mind:

  Do

  • Find high-quality companies and investments at the right price that you can hold for a long time
  • Collect steady dividends or growth over the long term

  Don't

  • Jump in and out of investments to try and time the market
  • Be swayed by short-term price movements

  Short-term speculation vs. long-term investing

  Investing is a marathon, not a sprint.

  Broadly, investors can be grouped into two camps – short-term speculators and long-term investors.

  Speculators try and predict the market’s next steps. They’ll chop and change their investments trying to profit from the small changes in the market. Usually, their time horizons are a few months or even less. This can be very risky.

  Long-term investors ignore the short-term hype and look two steps ahead, picking companies they think have the potential to perform well over five to ten years.

  We think the best investments show their value in the long term.

  This chart shows the 10-year rolling returns for the FTSE 100 index over the last 30+ years.

  Scroll across to see the full chart.

  Past performance is not a guide to future returns. Sources: Refinitiv, Lipper IM, as of 31/12/2023.

  	Dec 2018 - Dec 2019	Dec 2019 - Dec 2020	Dec 2020 - Dec 2021	Dec 2021 - Dec 2022	Dec 2022 - Dec 2023
  FTSE 100 index	17.32%	-11.55%	18.44%	4.70%	7.93%

  Before charges or taxes, investors playing the long game (10 years in this case) were rewarded with profits in all the periods between 1990 and 2023. Even during the 2008 financial crisis.

  The most valuable lesson is that investing for the long term gives you the better chance of success. Remember past performance isn’t a guide to the future.

  Real costs of trading too much

  Trading too often can affect the performance of our investment portfolios over the long term for a number of reasons:

  Fees and charges

  • Dealing fees – you’ll pay your broker a dealing fee each time you buy and sell shares. See our dealing charges.
  • Government taxes or levies – when buying UK shares, you’ll normally pay 0.5% Stamp Duty on the value of the trade (excluding other charges).
  • Foreign Exchange (FX) – this is a charge to convert the currency if you’re buying or selling investments traded in a foreign currency. Although this will depend on who you invest with.

  Bid/offer spread

  • This is the difference between an investment’s buy (offer) price and sell (bid) price. Investments that aren’t traded as much will often have a bigger spread – like shares in smaller companies. More frequently traded stocks, like FTSE 100 shares, can have a smaller spread.

  Portfolio turnover

  • This measures how frequently a manager trades the investments in their fund. The higher the turnover rate, the higher the fees because of the trading costs. Actively managed funds tend to have higher turnover rates than passive (index tracker) funds. It’s essential to read the Key Investor Information Document (KIID) before you invest to understand these underlying costs.

  These costs add up so make sure you know what you’re being charged.

  Some other things to think about:

  • Reduced returns – frequent trading can use up your capital gains allowance quicker, increasing your tax charges.
    

    Read more on taxes

  • Diversification – overtrading could mean you end up with more of your portfolio in riskier investments. Keeping it balanced is key.
    

    Learn how to diversify your investments

  • Missed opportunities – trading a lot could mean you miss the best days in the market.
    

Strategies

At a glance

• Before you place a trade, ask yourself these 3 questions – what are your investment goals, do you understand the company or investment, and are you aware of the costs?
• Diversification is a number one rule for investing. In a sports team, you wouldn’t pick players who are good at the same thing. Building a team of investments is no different. By diversifying, you spread your money between different investment types to reduce the overall impact of risk when investing.
• Funds give you access to lots of different asset types as an easy and convenient way to help diversify your portfolio.

• Find out more

  Questions to ask yourself before placing a trade:

  1. What are my goals for investing?
     Think about why you’re placing the trade, and why now. Is your portfolio missing this type of investment and will it help your long-term goal?
  2. Do I understand the details of the company or investment?
     Do you understand what the company does and how they make profit (if at all)? If the share price dropped by 5% tomorrow, would that change anything for you? Do you think the company could grow and evolve in the future?
  3. Am I aware of the costs?
     Is the investment’s price good value for money, and how much will dealing charges, stamp duty or FX charges eat into the total trade?

  Importance of diversification

  Diversification is an investing essential to manage your risk. Investment risk is the market ups and downs (volatility) you’ll experience when you invest. If an investment is riskier, it’s typically more volatile.

  You diversify your investment portfolio by spreading your money between different types of investments, like shares or bonds, or different countries and sectors, to reduce the overall impact of risk when investing.

  Picking individual companies isn’t always the answer to start diversifying – it’s not the easiest way. Investing in an individual company isn’t right for everyone because if that company fails, you could lose your whole investment. If you can’t afford this, investing in a single company might not be right for you. You should make sure you understand the companies you’re investing in and their specific risks. You should also make sure any shares you own are part of a diversified portfolio.

  But an alternative investment option is funds, where professional fund managers make the underlying decisions and choose a selection of investments. Either way, it’s important to regularly check in on your investments to ensure they still meet your objectives and attitude to risk.

  Funds – trusting the experts

  Funds offer an easy and convenient way to invest and are popular with novice and experienced investors alike. They offer a simple way of diversifying across a number of different investments, and access to the skills of a professional fund manager.

  A fund pools together the money of lots of different investors, and a fund manager invests on their behalf. Funds can invest in various types of assets like shares, bonds or property, depending on the investment objective of the fund.

  Investing in funds isn’t right for everyone. You should only invest in funds if you have the time and know-how to diversify your portfolio to help reduce risk.

  Before investing it’s important to check the fund’s objectives align with your own, understand the fund’s specific risks and if there’s a gap in your portfolio for that type of investment.

  More on investing in a fund

When’s the right time to start investing?

At a glance

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  Time in the market not timing the market

  There’s rarely a bad time to invest.

  It’s all about playing the long game. That’s at least 5 years – ideally longer. If you stand on the sidelines, you can easily miss the most profitable days of investing.

  Taking a long-term approach will help cut through the short-term noise of market movements and any worries about when’s the best time to invest.

  Scroll across to see the full chart.

  Past performance isn't a guide to future returns. Source: Lipper IM, from 03/01/2000 to 31/12/2023. Figures based on £10,000 starting investment and do not take into account inflation or charges.

  The chart above shows how missing the best days in the market can cost investors thousands. You would’ve been unlucky to miss them all, but is it a risk worth taking?

  Which way the market moves short term doesn’t really matter. What does, is staying invested and diversified across areas you think will perform well over the next five to ten years.

  Is cash really king?

  Cash often seems the safest option. Technically it is. Unlike investments, the amount of cash doesn’t change.

  But it isn’t totally risk free.

  Inflation is the cost of things we buy every day rising – it reduces our spending power, especially over the long term. It means money today buys you more than the same amount of money next year. Here’s how inflation can affect the future value of £100 today at different rates.

  Annual inflation	Real value today	Real value of £100 in a year’s time	Real value of £100 in two years’ time
  2%	£100.00	£98.00	£96.04
  5%	£100.00	£95.00	£90.25
  10%	£100.00	£90.00	£81.00

  By investing, your money could grow at a rate that outpaces inflation, helping you maintain and increase your wealth.

  If your investment grows by 5% and inflation is at 2%, you’ve made a net gain of 3%. Importantly, it means you’ve made a real return – the value of your money has outpaced inflation and is now worth more.

  The opposite is also true if your investment grows by less than the rate of inflation.

  Investing in the stock market generally yields better returns than cash over the long term.

  But it’s important to keep some cash tucked aside in a rainy-day savings pot for any unexpected emergencies. The amount depends on your circumstances.

  Pre-retirement	Retired
  Three to six months' worth	One to three years' worth

  Any cash left over after covering the above, that won’t be needed for the next five years, could be invested.

  More on how much cash you should hold