Six ways to take the fear out of investing

Investing in the stock market can be a great way of making money, but it can often be a little anxiety inducing. When you’re buying or researching investments there will be risk warnings at every turn – you’ll be repeatedly warned that performance isn’t guaranteed and that the value of your investments could fall. You might be prompted to consider your attitude to risk or how you would react to losses.

And it certainly doesn’t help during periods of volatility, when global stock market falls are so great they make headline news (as they did at the start of April when Trump announced his raft of trade tariffs).

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But investing doesn’t have to keep you awake at night. Getting a better understanding of stock marketing investing itself and taking steps to manage risk can keep your worries in check.

Here are six ways to make investing a little less daunting.

1) ‘Zoom out’ on investment performance

Whether you’re researching an index, fund or share online, you’ll likely come across graphs showing performance over time. But looking at what has happened to prices today, this week, or over the past month isn’t helpful, especially when they aren’t moving up. Price volatility is an inevitable part of stock market investing. To get a better understanding of performance over time, it makes more sense to “zoom out” to a year at least, preferably five or 10. 

Take the FTSE 100. At the time of writing, the five-day view showed something of a slump. But adjust the view to five years and the picture was much more reassuring. Despite major falls during the Covid pandemic, you can clearly see that the long-term trajectory is upward.

This is why it’s important to think of your time horizon when you invest. Stock market investment is normally only recommended if you can afford to leave your money untouched for five years at the least, if not 10 years for more cautious investors. That way you have time to ride out short-term volatility.

If you will likely need your money during the next five years, it makes sense to keep your money in a competitive savings account.

2) Don’t put all your eggs in one basket

Diversification is one of the central tenets of successful investing and it’s an easy way to reduce investment risk.

The idea is that by spreading your money across a broad range of investments, regions, and asset classes, the value of your overall portfolio shouldn’t take too much of a hit, if one holding or sector doesn’t perform well. You aren’t staking your future finances on the performance of one investment.

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This is why new investors (as well as those who don’t want to spend hours researching shares) are often encouraged to invest in collectives such as funds or exchange-traded funds (ETFs), that provide exposure to a broad basket of shares, rather than buying individual shares.

It’s even possible to combine equities with lower-risk bonds in one holding by using multi-asset funds, giving you a balanced portfolio of investments in one, core holding.

3) Get to grips with compound returns

Understanding how compounding works may also help settle your nerves. It also provides a powerful incentive to start investing sooner rather than later.

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When you invest in the stock market and reinvest your returns, you will start to benefit from compounding. This is where the money your investments earn, starts working for you and earning returns too. Think of it like a snowball rolling down a mountain, picking up more snow, growing bigger and gaining momentum as it goes. The longer you invest for, the bigger the impact compounding will have on your returns and the less you’ll need to invest overall to reach your investment goal.

4) Go for passive rather than active investments

When you buy investment funds, you’ll be able to choose between active and passive options.

Active funds will have a fund manager at the helm, who will effectively run a portfolio of shares on your behalf, based on their own research and convictions. A passive fund, meanwhile, will simply use a computer algorithm to replicate the performance of the index it’s linked to, such as the FTSE 100 or the S&P 500.

Passive funds don’t sound terribly exciting but they are cheap and, arguably, the lower-risk option. Your investment will, by its nature, never outperform the index, which is what active funds aim to do. Nonetheless, your returns will at least match the index, which isn’t guaranteed with pricier active fund managers.

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Take investing in the US as an example – a heavily researched region where it’s difficult for managers to add value. Over the last 15 years, only 10.5% of active funds outperformed the index, according to SPIVA analysis from S&P Global.

Opting for a passive investment can also take some of the stress out of choosing funds. It’s simply a case of settling on an index and then finding the cheapest fund or ETF to track it. With an active fund, you would need to research individual managers and compare their approaches to find one that resonates with you.

5) Invest regularly

Drip-feeding your money into the markets gradually over time is lower risk than investing a single lump sum.

That’s because you’re dipping your toe into the water and only gradually exposing your money to risk. If you invested a lump sum into the stock market and it dropped 10% the next day, you would quickly find yourself nursing a significant loss.

When you invest regularly you get to take advantage of the phenomena that is “pound cost averaging”. Each time you invest, the price of your investment is likely to be different. When the price is higher you’ll get fewer shares or units and when it’s lower you’ll get more. This effectively means that over time you are buying at the average price – rather than buying them all at what could be a high or low.

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While this can provide you with some protection from big falls, it does mean you won’t get the full effect of a big upward swing either.  However, over time, pound-cost averaging will deliver smoother returns and reduce the impact of volatility on your overall investment.

Another plus is that by setting up small, regular payments – automated by your investment platform – your investing is scheduled and you spare yourself the worry of attempting to time the market, which can happen if you invest larger sums.

6) Top up your pension

Paying into a pension isn’t any less risky, per se, than investing into a stocks and shares ISA or a trading account. Risk lies with your choice of investment, not the wrapper.

However, when you pay into a pension, you’ll get the added benefit of tax-relief on contributions. This means the value of your investment will grow before you even consider stock market returns.

The catch is that your money won’t be accessible until age 55 (57 from 2028). However, it will give your retirement finances a helpful boost.

It’s easy to top up your retirement savings with a flexible personal pension such as a self-invested personal pension (SIPP). Your contributions will benefit from 20% basic-rate tax relief automatically (turning a £1,000 contribution into £1,250 in your pension). However, if you pay higher or additional rate tax on your income, you can claim a further 20% or 25% tax relief back through your tax return.

You can pay the rebate into your pension if you wish, or use it to lower your income tax bill.

If you’re topping up a workplace pension, you may get the correct rate of tax relief applied automatically, it depends on your scheme. If you aren’t sure, check with HR.