Is now the best time to invest?

Traditional saving accounts are generally seen as the safest way to save. However, with high inflation and low deposit rates, holding cash is becoming increasingly risky. When the rate of interest you receive is less than the rate of inflation, the ‘real’ value of your money falls and you are able to buy less and less over time.

If you do not need to access your money for at least 5 years, investing in a well-diversified portfolio should provide greater potential for beating inflation than cash. However, you need to bear in mind that investing comes with risk, but in return for an appropriate degree of risk you may have the opportunity for your money to work harder.

In addition to the amount of risk you are comfortable with, you should also consider the level of income you require, the time you wish to invest for, the impact of taxation and if you have any ethical considerations.

There is a general misconception that investing is about trying to time the market. The cost of waiting for the perfect time to invest typically exceeds the benefit of perfect timing. As timing the market perfectly is nigh on impossible, the best strategy for most of us is not to try to time the market at all. 

It would be great to be able to predict the future so that we would know the optimum time to buy when prices are low and sell when they are high. Nobody can know for sure what the markets are going to do from one day to another, and one sector that outperforms one year can ‘tank’ the next. 

Therefore, it is better to focus on time in the market. Most investments are described as a medium-to-long-term commitment. That means leaving your money in the same place for at least 5 years. The longer you invest, the greater your potential for making a profit.  Historically, markets tend to rise over time but there are likely to be short-term fluctuations and even some losses along the way.

This is why it is important to have an appropriate amount of cash set aside to cover any planned expenditure and any unforeseen costs. Cash can also be used in a market downturn to replace any income you may have been taking from your investments.  By turning off the income ‘tap’ it should give your investments time to recover from any losses and reduce capital erosion.

When you invest, the value of your investments will change constantly in response to what is happening in the markets. These ups and downs, or volatility, are a normal part of investing. It is often the case of holding your nerve and not making any knee jerk reactions like cashing in your investments when the markets fall which would crystallise any losses. 

One way to reduce the volatility of your investments is to diversify. This can be achieved by investing with different fund managers who have different styles of investing, investing across different sectors, asset classes, countries, and currencies. ‘Don’t put all your eggs in one basket’ – the idea being that losses to one investment could be offset by gains on another.  

Markets rise and fall all the time, so if you are investing a lump sum in one go and then the market falls, it could take a while before your money builds back up again. You can reduce this risk by investing regularly or phasing your lump sum in over a 6–12-month period and thereby benefiting from the highs and lows in the market. Otherwise known as ‘pound cost averaging’ it can help reduce the risk of investing when the market is overpriced.

Investing regularly can also remove the worry of trying to decide when to invest your money. Trying to time the market is difficult and usually driven by emotion. People will often do the contrary to what they should do as they often want to invest when markets are deemed high and withdraw their money in a falling market.

By investing what you can afford on a regular basis, and forgetting about it, those small amounts could soon turn into something substantial.

If you do not have the knowledge or experience to optimise returns yourself then it may be wise to employ the services of a suitably qualified investment specialist who will be able to make recommendations following an in-depth discussion about your circumstances, risk tolerance and objectives.