When being average could put you ahead

Investing in financial markets can feel like a big decision. It can also feel like you need to wait until ‘the right time’ to start investing. But there are perils with trying to time the market. Here, we outline some ‘dos’ and ‘don’ts’.

Don’t be a slave to your savings account

Whilst you add cash to your savings account, it will probably feel good to be able to put some money aside, but a savings account may not be working as hard for your money as you did to earn it.

With the recent high inflation rates (a measure of how quickly prices of everyday goods are rising), interest rates have been rising in an effort by the Bank of England to get inflation under control. Higher interest rates mean that you can now earn more from a savings account than the next-to-nothing rates that have been on offer for many years. But that is still not necessarily the best thing to do. Not if you could be investing your spare savings in something that has the potential to earn more than low single-digit savings rates.

Don’t run before you can walk

So let’s say you’ve decided that piling cash into a savings account until you have enough money / feel confident enough / just get round to remembering, to invest, isn’t the best thing to do. Make sure you don’t run before you can walk – in fact, don’t run at all.

Running ahead and placing everything you’ve got into an investment could be the wrong thing to do. We recommend that savers keep a cash reserve of what they would need to live off for six months, as a minimum emergency fund before they start to consider investing.

Even when you have your emergency cash fund in place and an amount of extra savings on top ready to invest, it could pay to access financial advice to check you are considering the types of investments that suit your needs and fit the level of risk you can and are willing to take. However, note that as with all investing, returns are not guaranteed, and you may get back less than you invest.

Don’t think you are smarter than the market

It doesn’t matter how much research you do on markets or economic cycles, trying to time the market is a notoriously difficult thing to do, even for the most experienced investors.

Yes, there are past patterns to economic cycles, but there can always be external shocks that change the path of the economy – such as the Covid-19 pandemic and the conflict in Ukraine. And you can’t always assume that financial markets are rational and will behave in the way you think they might when a shock occurs. In March 2023, Silicon Valley Bank (SVB) and Credit Suisse both collapsed. Equity markets initially fell as investors became nervous, but by the end of the month, UK shares were marching higher again – not something you’d expect so soon after a banking crisis.

You could end up investing your money into the market at the ‘wrong time’, and suffer a big loss when you’ve only just got started – but so could even the most seasoned investor. Don’t think you can out-smart the market by taking your money back out and buying back in at a better time. We believe the prudent thing to do is to keep your money invested for the long term to ride out the ups and downs - “time in the market, not timing the market”.

Do average out the market falls if you can afford to

If you have a large enough amount of money to invest, over and above your emergency reserve, investing smaller amounts regularly may help to smooth out market falls. This approach means that if you are unfortunate enough to invest just before a big market fall, you won’t have mistimed your entire savings. This approach to investing is called ‘pound-cost averaging’. It means that you are averaging out the cost of investing every pound. Bigger isn’t always better; being average could put you ahead.

Do regularly check the on-going suitability of your plan

Just as investing in one go could be a mistake, so too could be making one financial plan and assuming that nothing changes in the investment environment or your future goals. As mentioned above, history tells us that we cannot predict markets, which are often driven by external shocks that no-one could foresee, with the pandemic and Ukraine being recent examples.

In a similar vein, as much as we try to plan for our futures, we cannot predict every eventuality. What if you suddenly became ill and couldn’t work? You may need to draw an income from your investment to tide you over until you are able to return to the workforce. But what if you had tied all of your investments up in longer-term fixed investments that incurred large penalties to get out of? This may have suited you ten years ago, but could be costly now.