Why focusing on short-term returns when investing could jeopardise your wealth
An article in the Financial Times makes for interesting reading, as it reveals that two-thirds of UK investors are prioritising short-term returns. The article features research that was carried out by Schroders, which also found that UK investors anticipated annual returns of 11.26% over the next five years.
With UK investors looking for higher levels of growth, it’s perhaps not surprising that researchers also found that 75% of British investors felt forced to take more risk than they would like. If you’re one of them, you may not realise that focusing on short-term returns and taking greater levels of risk could significantly increase your chances of financial losses.
Read on to discover why this is, and how a financial planner could help you expose your money to greater growth potential at a level of risk you’re happy with.
Greater returns mean increased risk
Growth potential typically comes from the “higher-risk assets” that are contained within an investment, such as stocks and shares, otherwise known as “equities”. If you want to increase your investment’s growth potential, it’s likely that you will need a greater proportion of these higher-risk assets within it.
While this may sound easy enough, there is a catch. Higher-risk assets also expose your money to greater potential for losses. This could happen, for example, if the markets take a downturn, as they did during much of 2022.
If you want to reduce the risk of potential losses, you would typically do this by having a larger proportion of “lower risk” assets in your investment, such as bonds – also known as “gilts” – cash and even commercial property.
The catch with these assets is that they usually reduce your money’s exposure to growth potential. To demonstrate this, you may want to consider the following illustration from the 2019 Barclays Gilt Study, which followed the nominal performance of £100 invested in bonds or equities between 1899 and 2019.
Source: 2019 Barclays Gilt Study
As you can see, despite downturns along the way, equities provided stronger long-term growth than gilts. Please remember that past performance is no guarantee of future performance.
Working with a financial planner could help you understand whether taking a higher level of risk is right for you, and the levels of returns you should realistically expect. A planner could also create an investment strategy that helps you achieve your financial goals without exposing your money to a level of risk that you’re uncomfortable with.
It’s time in the market, not “timing” the market that counts
Research suggests that the longer you invest your money for, the less likely you are to lose money. This is backed up by a study carried out by Nutmeg, which revealed that holding an investment for 13 years or more reduces the probability of loss to almost zero.
One reason for this is that if you are investing for the long-term, you’re more likely to ride out any short-term downturns in the stock market and wait for your investment to recover.
If you invest for a shorter period and then need to sell your investments when the stock market suffers a downturn, you could end up making significant losses. Furthermore, it will deprive your money of the opportunity to recover.
To demonstrate this, you might want to consider the following table, which shows the annual return of some of the major stock indices between 2011 and 2021.
Source: JP Morgan, FTSE, MSCI, Refinitiv Datastream, Standard & Poor’s, TOPIX, J.P. Morgan Asset Management. All indices are total return in local currency, except for MSCI Asia ex-Japan and MSCI EM, which are in US dollars. Past performance is not a reliable indicator of current and future results. Data as of 31 January 2022.
As you can see, while stock markets tended to produce positive annual returns, there were one or two downturns along the way. For example, if you were invested in the MSCI Europe (ex-UK) or FTSE All Share in 2018, your investments would have fallen in value.
If you decided to sell your investments you would have locked in any losses your money made, and deprived it of any future growth potential when the market bounced back. This is why investing should always be seen as a long-term venture, and never entered into lightly.
Get in touch
More often than not, taking a long-term approach to investing will be the better strategy. So too is working with a financial planner, as they will help you understand the stock market, how best to maximise your money’s growth potential, and the level of risk you should be exposing your cash to.
This could help you sidestep short-term losses and provide peace of mind that you’re on track to meet your long-term financial goals. If you’re considering investing and would like to discuss the right strategy for you, please contact us on firstname.lastname@example.org or call 01234 713131.
This blog is for general information only and does not constitute advice. It should not be seen as a substitute for financial advice as everyone’s situation is different.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance. Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.