September 28th, 2021

Why you shouldn’t let the pandemic impact your risk tolerance when investing

In recent months, there has been a surge in the number of Brits getting involved in investing through trading apps. While it’s good to see more people taking an interest in their financial future, taking this DIY approach can pose some problems.

One of the biggest issues is that, without professional guidance, many people don’t have a good understanding of risk tolerance and can often be overly cautious. While there can be times when this is a good approach, it isn’t always the best strategy.

Studies have shown that many young investors have become more cautious since the beginning of the pandemic. Read on to find out why you shouldn’t let it affect your risk tolerance.

Studies show that the pandemic has made many younger investors more cautious 

The coronavirus pandemic, and subsequent lockdowns, have had a significant effect on the UK economy. Despite strong growth in recent months, according to the Office for National Statistics (ONS), the UK’s GDP is still 2.1% lower than its pre-pandemic level.

With this in mind, it may not be surprising that this economic shock has concerned many younger investors. According to a report published in the FTAdviser, more than half of 18- to 24-year-olds have become more risk-averse since the start of the pandemic.

The study also noted that half of 18- to 34-year-olds said they had paused on making any major investment or financial decisions in the past 12 months due to the recent economic shock.

Given that many of these people are too young to remember previous crashes, such as the 2008 financial crisis, it’s understandable why they might be worried. However, this caution isn’t always the best approach.

Psychological biases, like loss aversion, can impact your investing strategy

While we might like to think that we can make objective and rational choices with our investments, this isn’t always the case. Often, our innate psychological biases can impact our decisions without us even knowing it.

One of the main ones that can affect us is the “loss aversion” bias. Essentially, this is the idea that people tend to feel the pain of loss twice as strongly as the pleasure of gain, which can skew your thinking.

If a major financial disruption, such as the coronavirus pandemic, affects your confidence then subconsciously you might switch your aim to simply avoiding the stress of loss. As you might imagine, this can lead to you being too risk-averse in your investing.

It’s important to consider the long term when investing

While it might be easy to be concerned about the impact that major events can have on the economy in the short term, when it comes to investing it’s important to think about the long term instead.

According to a 2020 study published by Nutmeg, if you randomly picked a trading day in the stock market between January 1971 and June 2020, and invested for just that one day, you would have a 52% chance of seeing a return on your money.

If instead you invested for three months in that same period, your likelihood of making a profit would rise to 65%. Similarly, investing for a full year raises your chances to 72% and for 10 years increases it to 97%.

One of the main benefits of investing when you’re young is that you can afford to have a fairly distant time horizon. This can help you to ride out periods of economic instability as, even if you make a loss in the short term, you’re likely to make a profit in the long term.

Working with a financial planner can help you to grow your wealth more effectively

When it comes to investing, it’s easy to be overwhelmed by all the things you need to think about. This can make it easy to see temporary blips, like a fall in the stock market, and start to panic about your portfolio.

It can be beneficial to seek professional advice when you invest your money. Working with a financial planner can help you to make properly informed decisions, giving you a greater sense of confidence and control.

They can also work with you to come up with a comprehensive investing plan that lays out your financial goals and sets out how to get there. This can give you a greater sense of confidence when you invest, so you don’t need to worry about disruptions.

A planner can also act as a sounding board to help you weigh up the pros and cons of an investment. This can also help you to find the right level of risk for your needs, finding the balance of making sure that your wealth grows enough to meet your goals without exposing you to undue risk.

Get in touch

If you want to know more about how working with a financial planner can help you to grow your wealth more effectively when investing, get in touch. Email or click here to request a call back from one of our advisers.

Please note

The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.

This article is no substitute for financial advice and should not be treated as such. To determine the best course of action for your individual circumstances, please contact us.

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