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Don’t let Woodford put you off investing

29 November 2019

4 minute read

Clare tells us why, despite the recent Woodford fund crisis, you should still consider investing and points out three simple ways to manage your risk.

Who's it for? All investors

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. Tax rules can change and their effects on you will depend on your individual circumstances.

What you’ll learn:

  • How investing could help reduce the savings gap in the UK
  • Why you should consider investing
  • How you could manage the risk of your investments.

The Woodford fund crisis has hit many investors hard, so it’s no surprise that confidence in the industry has been badly shaken.

With Woodford’s investors still unable to get access to their money, it’s not over yet and there is a real danger that many people, who might benefit from investing, could be put off for life. This would be a massive setback – not only for the investment industry but, more importantly, for many hard-working savers who, despite their best efforts, are struggling to set aside enough for their future.

We’ve got a huge savings gap here in the UK. According to the Government’s 2017 Automatic Enrolment Review, 12 million people are currently not saving enough for their retirement. Put bluntly, it means millions of people are at risk of running out of money before they die.

In order to tackle this problem, we need to encourage more people to consider investing because, over the longer term, the hope is it will stand you in better stead than keeping all of your savings in cash.

But, as those with money currently locked up in one of Woodford’s funds know only too well, there are risks with investing and it’s understandable why a lot of people will now think it’s not for them and opt to keep their money in a cash savings account.

That said, it’s important to try and retain some perspective. What’s happened at Woodford Investment Management is highly unusual and, while there is always a risk that you could lose money because the value of investments can fall as well as rise, there are steps you can take to reduce the chances of that happening.

We should point out, investing isn’t for everyone and should only be considered if you’ve already built up some cash savings and have money you can put away for at least five years. The nature of stock markets means that the value of your investment is likely to go up and down, regardless of when you invest. And while nothing’s guaranteed, the longer you keep your money invested, the greater the chance you’ll ride out any down-turns and see the value rise. You also stand to benefit more from the impact of compounding.

Yes, you’re taking on risk, but the hope is that over time you’ll be rewarded for doing so. And don’t forget, while cash may seem like the safe option, in today’s low interest rate environment, the purchasing power of that money will at best remain flat, but more likely decline due to the effect of inflation. Inflation can of course, also eat into investment returns, but the impact will hopefully be less if the growth you’ve achieved is greater than the interest paid on cash.

So, if you’ve built up your cash savings and are considering investing, here are some simple ways to manage the level of risk you’re taking:

Don’t put all your eggs in one basket

Buying shares in a single company is a high risk strategy, because your returns are dependent on how that one share price performs. Investing in a fund can help reduce the risk but, as some Woodford investors have found out, putting all your money in one fund can also be risky. So look to spread your money between a number of different investments, or consider a Ready-made Investment as they invest in multiple funds which hold different types of assets such as shares, bonds and cash. Diversify, diversify, diversify – it’s the investment mantra you should always remember.

Calm merry-go-round or risky rollercoaster?

Some investments are riskier than others and, generally speaking, the higher the level of risk you’re willing to take, the greater the potential gains and losses you expose yourself to. But risk isn’t dissimilar to pain, and some people have a higher tolerance than others. So think about how much risk you’d be comfortable with – the last thing you want is to be kept awake at night worrying about your investments. All funds have a risk rating, with one being the lowest and seven being the highest, so do your research and look for this on a fund’s Key Information Document.

Know your bonds from your funds

Finally, whilst you don’t need to be a financial guru to invest, it’s important to understand the basics of the different types of investments and how they work. We’ve got lots of information designed to help on Smart Investor. And once you’ve got to grips with the basics, there are plenty of other tools and resources also available to help with your investment decisions.

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