Why investing should be treated like healthcare

By Qiaojia Li, co-founder and CEO at the award winning wealthtech company, Rosecut

For many people, the process of investing can seem opaque and impenetrable, and filled with jargon.

They can see the potential benefits, but they can also see the Financial Conduct Authority (FCA) risk warnings.

Despite – or perhaps because of – this, the long-term trend suggests that more individuals are open to investing. One set of statistics suggests the percentage of individuals investing in stocks and shares in the UK grew nearly three per cent between 2010 and 2018.

Here are four steps for sensible investing:

1. Figure out why you invest, ahead of everything else

The key here is knowing what the overall goal is.

It is a constant source of amazement that when it comes to investing, few people stop to consider why they are actually doing it. Whether they have £100 or £100,000, many do not think about how their approach should be dictated by their overall goals.

For instance, someone looking to buy a house in the next 12 to 24 months should not be looking to dive into the world of bonds and equities, because they have a short-term target which requires reasonably fast access to cash. Tying their resources up in different funds and stocks will not only limit how quickly they can get their hands on their money when it comes to putting down a deposit, but they will not see the return that they would expect due to the short term price fluctuation of these assets. They would be better using a Cash ISA and enjoying the tax-free allowance.

On the other hand, if they have spare cash lying around that they won’t need for the next 3-5 years or longer, or they want to get a headstart on earning their retirement or long-term financial freedom, investing into financial markets is the way to generate compound return. That will give them a chance to beat inflation and, in all likelihood, it will give them a higher return than real estate would.

It is like any big project – determining the overall goal informs the strategy, which dictates the tactics. In the world of investment, this means management. Yet even deciding what goals they are working towards can be challenging for some people – they might have overinflated ideas or be too conservative.

This is where independent, objective, and knowledgeable financial planning comes in. By giving an individual’s finances a thorough check-up – much like visiting a GP – a qualified and experienced financial planner can consider circumstances, wishes and constraints. Only when this has been completed can they assess how feasible a client’s goals are, and the client can start considering how they should invest.

It needs to be a bespoke diagnostic and prescription process, in much the same way that a trip to the doctor requires the practitioner to have an understanding of any contributing factors and your medical history.

2. Seek professional help

If you were going to buy a property, you would look for a capable and qualified property lawyer instead of reading legal textbooks and undertaking training. The same logic applies to other professional advice, such as accounting, medical treatment and tax. Strangely, though, when it comes to investing, many people attempt to teach themselves.

While this approach is to be applauded, and there is certainly a huge amount of information readily available within a couple of clicks, the intricacies and vagaries of asset classes and funds, opposing investment styles, individual savings accounts and a hundred and one other terms can be overwhelming.

Forging ahead without professional guidance is a bit like having a pain in your hand and deciding to do a bit of exploratory surgery based on watching medical documentaries – there is only a slim possibility everything will turn out fine. This is why 99% of people have lost money by DIY-ing their own investments. It is a risky learning curve that, frankly, is better outsourced.  Learning how to find a good investment provider can be a more efficient and less risky use of your time.

3. Do not trade

In the report quoted above, there is an alarming line: “Investors are now holding onto their shares for 0.8 years on average before selling them. In 1980, the average was 9.7 years, representing a decline of 91.75%.”

The proliferation of trading apps brings convenience and lowers barriers, helping people to access financial products, but the user friendliness of the technology often encourages over engagement at a real financial cost.

On an individual basis, each time you buy and sell any financial product (not just shares, but funds too)  you lose a tiny slice of your capital, even if you can trade for free – this is due to “spread” which, put simply,  is the price difference between purchase price and sale price. As you trade, this quickly adds up and eats into your principal, which you need to earn back before seeing any profit. This is a direct cost, in addition to the time you invest, checking the share price several times a day, the sleep you lose during volatile days, and the potential for developing an addiction, which is a common result of trading. Take a look at your work pension investment report if you have any – there is a reason why professional investors don’t buy and sell frequently.

On a collective basis, crowd trading behaviour drives more “boom and bust” cycles of financial markets, which has happened many times before and will continue to happen in the future. It is a more pronounced characteristic of less developed financial markets where there are fewer professional/institutional investors to stabilise  the market for everyone’s benefit.

4. Diversify globally, meaningfully

Sensible investing requires a skillset that is the opposite of most professional careers or entrepreneurship. In the latter, one strives to become an expert in a chosen arena in order to command the highest possible pay or profit margin. A wise investor, meanwhile, needs to be a generalist rather than a specialist, and investing is about hedging all possible risks before seeking a return. One of the biggest principles to reduce risk is to diversify on various levels:

• Your holding currency – for example, GBP has lost more than 15% in value against USD compared to the pre-Brexit high of five years ago, so it is a bad idea to hold all your assets in GBP only
• Your country/geography exposure – for example, you can buy GBP priced US assets, or USD priced US assets, such as S&P 500 tracker, to have a slice of US economy growth. We strongly encourage people to consider a globally diversified portfolio, for the reason that different economies go through business cycles and are at different stages at any given point of time. With a globally diversified portfolio, you can always benefit from the growth of some country, somewhere, at any given point of time
• Asset classes – If all your money is in London real estate, for example, you are likely to have felt some value depreciation since 2014. You take a risk if you tie your financial future to a single city’s economic cycle and potential rise and fall.
• Industry allocation – as a former banker I never bought banking stocks or bonds, simply because my job and salary were already tied to the UK banking sector, and owning a piece of banks is like doubling down in a casino – not wise for risk mitigation. This is an often overlooked risk – people like to invest into companies and sectors they know well, typically from professional exposure and “inside knowledge” but this leads to blind spots and concentration risk.

Investing should be part of one’s long term financial strategy hence there is no one size fits all recommendation that I could give here. A simple step by step guide is:

1. Save a good portion of your monthly income, that allows you to enjoy your current life but also prepare for the future

2. Shortlist 3 financial planners (include Rosecut as one option) and pick one that you feel you can trust and who is cost effective to lay out your big picture and future plan

3. Invest regularly into a globally diversified, professionally managed portfolio that fits with your future goal and then make minimal changes. Ideally you should only even consider changing on an annual basis

4. Learn from this loop, iterate and optimise, ask many questions along the way!

Rosecut is a financial planning partner and investment manager, giving access to the knowledge you need to plan for the future you want. Start your free financial health check today at https://app.rosecut.com/ or download the app.