The last two years have been a harsh reality check for investors. High inflation, the cost-of-living crisis and drawn-out war in Ukraine have caused most investors (not least the sustainably-minded ones) to experience some losses.
Not only that, rising interest rates means our daily lives are increasingly more expensive too. With this double whammy, it can be hard to know what to do with any extra money we do have for the best.
But while financial markets aren’t always predictable, we have the benefit of a long history to look back on. This shows us that the longer you invest for, the better the outcomes can be.
So, here are six tips for riding out the storms and sticking with sustainable investing over the long term.
1. Set your expectations
Before you invest, take a long hard look at your finances. Do you have expensive debt such as high-interest credit cards? If so, pay this off first.
Then, work out what you can afford to invest. This must be SPARE money, which means what’s left after all essential needs are met (and even non-essential ones such as money for Christmas, birthdays and holidays).
Set a goal for your investment – what kind of timeline are you aiming for? Are you investing to bolster your retirement pot or for your children’s future, or something a little sooner like a wedding or new home? Bear in mind that investing should always be considered long term, which means at least five years and preferably more. Which leads us nicely to..
2. The longer you invest, the better
The longer you invest, the better your returns are likely to be (‘likely’ is important here, as there are of course no guarantees). Research by Schroders based on 100 years of historical data shows that if you invested in stocks and shares for very short periods, you would have a relatively high chance of making a loss. For one month, the chance of a loss was 40 per cent; for five years it fell to 23 per cent; for ten years 14 per cent and for 20 years the chance of making a loss after inflation was zero. By contrast, holding on to cash over longer periods is highly unlikely to ever beat inflation.
Although this is encouraging, don’t forget that past performance is not a guarantee of future performance.
3. Use the magic of compound interest!
Compound interest is a brilliant effect where interest earns interest on itself – so, the earlier you start investing the better. According to The Big Exchange, £50 a month invested over a thirty-year period would turn into £42,500 (based on a six per cent annual return and including fees – again though, past performance is no guarantee for future performance). In comparison, cash would become £18,000.
While cash is of course less risky as you won’t end up with less than you put in, inflation will erode its value over time. In other words, you can buy less with it in a year’s time than you can today.
Although you can’t guarantee that investments will make money, inflation in the UK is almost certainly going to happen. This is probably the most compelling reason to keep investing, as it means your money has the potential to bring higher returns than the rate of inflation.
4. Keep it simple
You don’t need to be an expert in investing to ride out the peaks and troughs in the markets. If you choose an actively-managed fund (see some good online platforms for these here), an investment pro will take care of everything for you. If you’re keen to invest with principles, you should check the ethics of your fund and what you are investing in – but you can sit back and leave the timing of trades to the experts.
Resist the temptation to keep checking on the performance of your investment and take a long-term view instead.
5. Keep your principles
When finances are tight it might be tempting to forget about ethical principles and put your money into a short-term profit prospect like oil instead. But remember, taking a longer-term view on future trends by investing today in the companies of tomorrow has to be more likely to pay off.
The urgency of the climate crisis and the world’s other big issues like biodiversity loss and poverty means the companies working on and offering solutions are best-placed to grow. It may not happen overnight, but if you believe this is the direction of travel, then you should stick with it.
6. Invest little and often
Investing isn’t just for the wealthy! You don’t need a big lump sum to get started. Little and often can in fact be a better strategy. ‘Drip-feeding’ your cash into investments – an effect called ‘pound cost averaging’ means you are more likely to ride out volatile markets. Ie. the prices you invest at are more likely to average out. You can invest from as little as £25 to £50 on many sustainable investment platforms.
Look out for our Good Guide to First-Time Investing, out soon!
Risk warning: Remember that when investing, your capital is at risk. The value of your investments can go down as well as up. Tax treatment depends on an individual’s circumstances and may be subject to change.