Making an investment plan and sticking to it

What you need to know

• Many people are keen to invest but have a ‘fear factor’ about doing so
• A wealth manager can help you understand how to invest
• Holding cash means you are exposed to the eroding effect of inflation
• You should ensure your investments fit your risk profile

Investing is one of the best ways to preserve and grow your wealth over the long term. But we know many people have reservations about investing for the first time, or increasing the amount they have invested.

Prudence is important when making decisions about your family's financial future, but an overabundance of caution may lead to missed opportunities. By doing nothing, you also run the risk that inflation will erode the value of your wealth regardless.

In this article, we explain how creating and sticking to an investment plan can help you overcome the 'fear factor' when investing.

When emotions override logic

We all want to ensure our families are financially secure, and not just for this generation, but for generations to come. The prospect of putting that stability at risk can, understandably, cause us to think with our hearts rather than our heads.

Indeed, our emotions can be very persuasive, especially where money is concerned.

Loss aversion is a good example. It's a behavioural bias whereby losses have a much greater impact on our emotional wellbeing than gains. A monetary loss feels approximately twice as bad as a comparative gain feels good, according to studies.¹

As a result, people seek to avoid losses wherever possible, even in scenarios where the potential benefits far outweigh the risks. With this in mind, it's not difficult to see how our natural instincts can become a major obstacle to effective wealth preservation and growth.

The fear of losing your money may also be exacerbated by the staggering array of options for how, where and when to invest. When feeling overwhelmed, analysis paralysis can set in, preventing you from making any investment decisions at all.

Holding the bulk of your wealth in cash or cash equivalents might feel like the safest option in these circumstances, particularly when interest rates are relatively high. However, the safest option today isn't necessarily the best option in the long run.

In fact, historically owning stocks has been a far more reliable way to beat inflation and grow wealth over time. But to invest your money appropriately, you need to have a plan.

Real asset class returns over the long term (US only)

Planning your financial future

For many people, making an investment plan helps remove emotion from the investment process. By working with a trusted wealth manager, you can gain a clearer vision of what you want to achieve with your wealth, and set out a detailed roadmap of the journey ahead.

At Rothschild & Co, we sit down with you and discuss your financial goals, determine how much risk you're comfortable with and define what time horizons you're working towards.

This helps us calculate how much of your wealth should be invested – and where – in order to fulfil your long-term objectives, while also ensuring you have enough money in cash savings set aside to meet your day-to-day spending needs.

When making a plan, we typically encourage our clients to think about their wealth in terms of different 'pots', each with a different purpose, such as considering time horizon and risk profile. We find this helps people to better visualise their financial future and the steps needed to get there.

Every investor has different financial goals, risk tolerance levels and time horizons, all of which will determine how much of your wealth should be allocated to each pot. As a starting point, we suggest keeping 1-3 years worth ‘lifestyle’ spending aside in cash.

Creating your investment plan is only the first step though. You must also stick to the plan, which is often easier said than done, especially when stocks are experiencing volatility and ‘Mr. Market’ is causing a commotion.

When market noise reaches fever pitch, the temptation to exit your investments can be overwhelming. In doing so, however, you could crystallise your losses before the markets have a chance to rebound and significantly impact your wealth.

A wealth manager can provide a steadying hand during these turbulent times, offering reassurance and acting as an empathetic sounding board for your financial questions and concerns.

Ultimately, our aim is to help you make the best investment choices, so that your money works harder for you and your family, both now and in the future.

Citations

[1] The neural basis of loss aversion in decision-making under risk, Sabrina M. Tom, 2008

Past performance is not a guide to future performance and nothing in this article constitutes advice. Although the information and data herein are obtained from sources believed to be reliable, no representation or warranty, expressed or implied, is or will be made and, save in the case of fraud, no responsibility or liability is or will be accepted by Rothschild & Co Wealth Management UK Limited as to or in relation to the fairness, accuracy or completeness of this document or the information forming the basis of this document or for any reliance placed on this document by any person whatsoever. In particular, no representation or warranty is given as to the achievement or reasonableness of any future projections, targets, estimates or forecasts contained in this document. Furthermore, all opinions and data used in this document are subject to change without prior notice.