A practical guide to investing, written by women, for women…

 

Why does investing matter?

 
Why write an investing guide for women? We think these four charts sum up the reasons as well as any…
 

 

Our goal is simple: we believe that investing can help to close the gender wealth gap and we want women to invest with confidence.
 

Why are women reticent to invest?

 
Investment platform Hargreaves Lansdown carried out a study on the primary reasons given by women for choosing not to invest.

Unsurprisingly, a fear of losing money and taking risks topped the table, followed by not having enough money.

There’s also a knowledge barrier and a general lack of confidence in making good investing decisions.

 

Facing the fear

 
While it’s natural to worry about taking risks and losing money, risk and reward go hand-in-hand – if you play it too safe, you may be sacrificing potential returns.
 

Beating inflation

 
Inflation made headline news by hitting a 40-year high of more than 11% in 2022. Why is this relevant? Well, inflation erodes the value of our money, meaning that £100 will buy you less than it did a decade ago. It also erodes the value of our savings and investments.

Looking at an example…the average rate of inflation over the last ten years was 2.9% versus an average interest rate of 1.2% for cash ISAs, according to Moneyfacts. This means that you’re actually losing money in ‘real’ terms every year as the inflation rate is higher than the interest rate.

 

 
By comparison, the average return on a stocks & shares ISA was 9.6%, meaning that these investments have delivered a significant ‘real’ return when you factor inflation into the mix.
 
The chart shows the impact of inflation on real returns: if you’d invested £10,000 a decade ago in a cash ISA, you would have lost £2,000 in real terms, whereas you would have a £12,000 gain from investing in a stocks & shares ISA: not a bad reward for taking on the extra risk.
 

Playing the long game

 
Given that investments can fall in value, it’s understandable to feel afraid of losing money. But it’s also worth considering the potential gains you might be sacrificing.

One of the key rules in investing is to ignore the short-term dips and focus on the longer-term.

The chart shows the S&P 500 index (which tracks the US stock market). There have been major stock market crashes at specific points in the last few decades, but these losses were recovered in subsequent years.
 

 
While it can be hard to see your investments fall, stock market downturns are part and parcel of investing.
 

Adapting to risk

 
It’s tempting to label all investments as high risk – but think of investing like a menu where you choose the options that match your appetite for risk. Some investors may be happy to accept a higher level of risk in their quest for superior returns while others may be comfortable with a more conservative approach.
 

Assess your financial position

Before deciding whether to invest, it’s worth taking the time to assess your financial circumstances.

Work out a budget

The first step is to compare your household income against expenditure to see if you have surplus money to invest. However, if you have higher-interest debt such as credit cards or personal loans, it may make sense to pay these off first.

Put aside a rainy-day fund

As a rule of thumb, you should put at least three to six months’ salary aside in an instant savings account in case of unforeseen expenses.

Set your financial goals

It’s important to have a clear set of financial goals, whether that means saving up to buy a house or building your pension pot, and to consider whether you might need to access the money at short notice. Your goals and time horizon will dictate your investment strategy, which we’ll come to later.

Decide how much you want to invest

You don’t need to invest a large amount of money, with some investment platforms allowing you to invest from £10 a month. There are two main ways to invest:

Lump-sum: you invest one (or a series) of lump sums over time. If the value of your investments rises, this can maximise your profit (but the opposite is true if they fall in value).

Regular investing: you invest smaller sums on a regular basis, for example, £100 a month. This ‘drip-feeding’ helps to smooth ups and downs in the value of your investments, effectively meaning that you’ll pay the average price over the period. If stock markets fall, you will be able to ‘buy more’ units for your money and reduce the average price you pay, but you can sacrifice gains in rising markets.

Consult a financial adviser

A financial adviser can help you make the right financial decisions, particularly for more complex products such as pensions. Fees are typically percentage-based but some advisers charge fixed or hourly fees.

There are two main types of advisers:

Whole-of-market: ‘independent financial advisers’ (IFAs) can provide advice on a wide range of third-party products rather than being restricted to a particular provider, which can be a benefit for investors.

Restricted: advisers that are only able to recommend a restricted set of products (such as mortgages) or from a limited set of providers (such as fund managers).

An investment strategy isn’t a one-size-fits-all solution: setting a clear investment strategy helps you manage risk and optimise potential returns.

 

Set your investment strategy

 
An investment strategy isn’t a one-size-fits-all solution: setting a clear investment strategy helps you manage risk and optimise potential returns.

What are your goals?

The first step is to define your goals: are you looking to build up a pension for retirement or save for a home? These will determine your tolerance for risk and your time horizon.

You might invest in higher-risk investments for a long-term goal or lower-risk bonds for a shorter-term goal.
In reality, you’ll probably have various goals with different priorities and timescales.

What is your time horizon?

If you don’t need to withdraw your money for some time, you may be happy to ride out periods of market turbulence. But if you’re close to retirement or need to withdraw money at short notice, a market downturn can cause a potential issue.

What is your appetite for risk?

Risk tolerance is your willingness to ride out market volatility (swings in the value of your investments). Are you willing to suffer short-term losses for longer-term returns? Would you feel tempted to sell your investments if the stock market fell by 20% tomorrow?

There’s no right or wrong answer here. Being naturally risk-averse can help to minimise losses and if your portfolio halves in value, it needs to double before you return to break even. However, being too risk-averse can limit future returns.

Appetite for risk is often categorised as cautious, moderate, and adventurous. More cautious investors tend to lean towards bonds and lower-risk equities, while the more adventurous might favour higher-risk equities.

What returns are you aiming for?

Risk and return are two sides of the same coin, with investors generally (but not always!) rewarded with higher returns from taking more risk.

As mentioned earlier, you should be looking to beat inflation so that the ‘real’ value of your portfolio is growing.

There are two main types of returns: capital growth and income, which we’ll explain in more detail in the next section.

Your investment strategy and portfolio should be tailored to the answers to these four questions but, if you are in any doubt as to the suitability of an investment, you should seek financial advice.

 

Building a portfolio | Step one – choosing an asset class

 
There are four main asset classes to choose from as an individual investor: equities (shares), bonds, commodities and property. Let’s take a whistlestop tour through each of these…

 

Shares

A shareholder effectively owns a small portion of the company and receives a return from capital growth and/or dividends.

Capital growth

This is simply the change in the value of your original investment. If you buy a share for £100 and sell it for £110, you’ve made a profit (or capital gain) of £10 or 10%.Share prices are a function of supply and demand – if a company performs well, increased demand from investors should drive up the share price. The holy grail of investing is to ‘buy low and sell high’ but, in practice, this is difficult even for seasoned investors so it’s important to research the company and sector in depth before investing.Markets can be unpredictable and share prices can fall, often due to broader events as well as company-specific factors. As we’ve mentioned earlier, stock markets are also naturally cyclical, so investors should have a time horizon of at least five (and preferably ten) years to smooth returns.

Dividends

These are cash payments to shareholders and are usually paid two to four times a year. This can be particularly useful for pensioners looking to generate a regular income while leaving their assets invested to grow.

You may have come across the term ‘dividend yield’ which is simply the dividend (per share) divided by the current share price.

If the dividend is £8 per share and the current share price is £100, the current dividend yield is 8%. It’s a useful proxy for the annual income you might receive (similar to the interest rate on savings accounts).

Not all companies pay dividends and dividends aren’t guaranteed, although companies typically avoid making major cuts to dividends as it can signal trouble ahead. Some of the most generous dividend payers can be found in the UK large-cap FTSE 100 index, although some of the large-cap US technology companies choose to reinvest their money in the business rather than paying dividends.

 

 

Bonds

 

Bonds are loans that investors provide to governments or companies in exchange for regular interest payments and the return of the original loan at maturity.

Interest (known as the ‘coupon rate’) is typically paid once or twice a year, providing a steady income stream.

Bonds are generally seen as a lower-risk investment than shares, particularly for UK and US government-backed bonds. However, corporate bonds often offer higher returns due to the increased risk of the company defaulting (not being able to repay the bond).

Bonds are given a credit rating and lower-rated (or riskier) bonds will typically pay a higher coupon rate. However, the market price of bonds will fluctuate once they start trading. By way of example, the recent rise in interest rates caused a steep fall in global bond prices in 2022.

 

Commodities

 

Commodities are raw materials or agricultural products, such as gold, oil, and wheat. As physical assets, they can move independently of stock markets so may provide a diversification option, as well as a potential hedge against inflation.

While investors could buy and hold some commodities such as precious metals, it’s more typical to invest in a fund that holds or tracks the price of the underlying commodities or invests in commodity-related companies.

Commodities are highly volatile assets, with weather conditions (such as floods or droughts), geopolitical conflict and supply chain disruptions driving large potential swings in price.

The price of gold may also rise during times of geopolitical or economic instability due to its perception as a ‘safe’ asset.

This volatility can create both opportunities and risks for investors but commodities should only form a small part of a diversified portfolio.

 

 

Property

 

Investing in bricks and mortar, whether directly in a house or indirectly through a property fund, can be another useful diversification option.

Some funds buy commercial property such as offices, shops and warehouses while others invest in property companies. These can offer the potential for capital growth (if the value of the property increases) and income (in the form of rent from tenants).

However, commercial property can be hard to sell, or ‘illiquid’, meaning that your money can’t always be withdrawn at short notice. Property prices are also tied to the economic cycle, with demand likely to fall in a recession or when interest rates rise.

 

Building a portfolio | Step two – Diversification

 

Diversification won’t necessarily maximise returns but it can help to limit risk. If you invest in an individual company and its share price plummets (or even worse, it goes bankrupt), this could make a serious dent in your portfolio.

Investing in a basket of different companies and assets reduces the risk of this happening. Here’s an example…if you’d bought Tesco shares a decade ago, you’d have made a 36% return overall but the share price fell by more than 40% in one year.

However, if you’d invested in a fund that tracked the UK FTSE All Share index, you’d have made a larger return of almost 70% and only lost 10% in the worst year.

 

Step three | Choosing how to invest

 
Whether you’re confident going it alone or using a financial adviser, it’s worth understanding the different types of investments…

 

Investing directly

One option is to invest directly, whether buying shares in individual companies, property or even precious metals.

As we mentioned earlier, it’s important to think about diversification. As a rule of thumb, you shouldn’t invest more than 5% of your portfolio in a single company and try to spread your investments across companies in different sectors and countries.

Investing via actively managed funds

Funds pool money from investors to be managed by a professional fund manager in a ready-made, diversified basket of investments. Investors share in any profits (or losses) and income generated by the fund. There are two main types of funds, active and passive, which are summarised in the chart.

 

 

Index investing via passive funds

Passive funds have become increasingly popular with investors over the last decade as a low-cost way of tracking an index such as the FTSE 100 in the UK or the S&P 500 in the US. If the index rises by 20%, the passive fund will rise by around 20% and the same is true if it falls by 20%. Active fund managers aim to outperform the index by deciding which investments to buy and sell. As a result, the fees are higher than passive funds but this may be justified if they succeed in outperforming the index.