Obstacles to investing - and how to overcome them

06 April 2019

We look at some common investment obstacles, and how to manage these in the hope of long-term gains.

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek independent advice.

What you’ll learn:

  • How drip-feeding money into your investments may help smooth returns.
  • Where to look for help when researching investments.
  • How emotions can impact your investment returns.

Investing means accepting the risk that you could lose money, but the hope is that over the long-term, any returns will be greater than those you may have achieved from staying in cash.

However, this is not guaranteed, and past returns should not be considered a reliable indicator of what will happen in the future.

Even if you’re comfortable with the risks involved, there may be other obstacles that you face when investing, particularly if you’re a novice. Here, we consider four of the most common, and explore some of the ways you might overcome them.

Lack of experience

If it’s lack of experience that’s stopping you investing, you could consider starting with those investments that are generally simple to understand. For example, passive or ‘tracker’ funds are typically low-cost, and mirror the movements of some of the world’s biggest stock markets, such as the FTSE 100 index of Britain’s biggest companies.

By contrast, active funds rely on the expertise of a fund manager with the aim of beating a particular benchmark. As you expand your knowledge, you may want to add more funds, spread across different sectors and geographical regions to your investment portfolio.

There are thousands of funds to choose from that spread risk among dozens of different companies. This wide choice can seem daunting, but there are plenty of online tools aimed at helping to guide your investment decisions. Barclays Research Centre, for example, offers a range of tools to help investors narrow down their options, including latest fund news and market data. Once you’ve found a fund you’re keen to invest in, you must read the fund factsheet and Key Investor Information Document (KIID) first, so that you can be certain you fully understand the fund’s risks, charges and objectives.

If you’re unsure where to invest, you could choose a diversified fund that does the hard work for you. For example, Barclays offers a choice of Ready-made investments, which offer a well-balanced investment mix across a wide range of shares, bonds, and other assets, and you can pick from an investment approach that’s tailored towards growth, or income. Whilst Ready-made Investments may appeal if you’re not sure where to start or don’t feel you have the experience to choose your own individual funds, please remember that this isn’t a recommendation. There may be other funds on Smart Investor which could equally or better suit your needs. You should seek independent advice if you need help with your investment decisions.

Find out more about Ready-made investments

When to invest

Deciding when the right time to invest can seem an impossible task, particularly as no-one can know exactly when share prices might rise or fall.

As a solution to this potential obstacle to investing you could do well to remain focused on the famous investment saying: “Time in the market is more important than timing the market.” General investment wisdom advises leaving your money invested for at least five years but preferably longer, to allow time for your investments to recover from any potential market setbacks.

Find out more about the significance of spending time in the market

You may also choose to ‘drip-feed’ money into the market on a regular basis – for example, many funds allow you to invest from as little as £50 a month. Investing regularly may help to smooth out any highs and lows, as you’ll benefit from what’s known as ‘pound-cost averaging’. As share prices move up and down, you’ll be buying at different prices, effectively paying an average price over a time period that can help smooth volatility. Yet there are no guarantees that investing regularly will leave you better off, as you could still end up with losses. Also, you may not achieve greater returns than investing in one lump sum. Whether you choose to invest a lump sum or regular contributions, your investment could rise as well as fall.

Before you invest, make sure you have some readily accessible savings that you can dip into when you need to. Don’t invest more than you can afford to lose either. If you can’t commit to a long-term time frame when investing, you may be best off sticking to cash accounts.

Understanding tax rules

Investment rules can seem complex, particularly around tax liabilities, which can have a big impact on returns.

Tax rules can and do change over time, and their effect on you depends on your individual circumstances, which can also change. One of the latest tax rule changes announced is the reduction in the dividend allowance, which fell from £5,000 to £2,000 in April 2018. Amounts above this threshold are taxed at a rate of 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for additional rate taxpayers.1

However, it is possible to reduce your tax bills when investing by using annual allowances. The Personal Savings Allowance (PSA), introduced in April 2016, enables basic-rate taxpayers to earn up to £1,000 a year in savings income tax-free. Higher-rate taxpayers have a PSA of £500 a year, so they can earn £500 a year in savings income before starting to pay tax on it. Each tax year individuals also have a Capital Gains Tax (CGT) allowance, currently at £12,000 in the 2019-20 tax year. You only pay CGT if your overall gains from assets within a tax year are above that amount.

To increase the opportunity for tax-free returns you can also invest up to £20,000 into tax-efficient ISAs in the 2019-20 tax year. You won’t pay income tax, tax on any dividends received, or Capital Gains Tax (CGT) on any returns from investments held in ISAs. You can invest your ISA allowance either in cash, or investments, or Innovative Finance ISAs, which invest in peer-to-peer lending, or you can put up to £4,000 of your allowance into a Lifetime ISA. Returns from ISAs don’t have to be reported on your annual tax return.

Managing emotions

Over the past year, plenty of commentators have speculated over when there could be a market correction, defined as a drop of at least 10% or more for an index from its recent high. This follows the FTSE 100 index of Britain’s biggest companies reaching a series of record highs.2

It’s natural to feel a sense of panic when the market may have reached a peak, and to leave money uninvested because you’re worried about losing it. After all, and it’s impossible to predict when the market will take a fall.

However, try not to let your emotions dictate your investment decisions. Considering how you might react to a market fall in advance of starting to invest could help you manage any emotions that arise in this event.

Investing and staying in the market may be difficult at times, but generally,in the past the longer investors have been prepared and able to stay invested, the more likely it’s been that that they have gained positive returns. However, there are no guarantees; the past performance of investments isn’t a reliable indicator of their future performance, and there is always the chance you could get back less than you invested. If you’re unsure about investing, you should seek independent advice. Barclays Smart Investor doesn’t offer personal investment advice.

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