The biggest barriers to investing and how to get past them

At this point, most people are aware that holding your wealth in cash is ineffective. Inflation rates have been above interest rates for some time (and are rising), meaning that the real value of cash holdings diminishes over time. 

Investing, on the other hand, can help people grow their savings over time and beat inflation. So, why are people still slow to get started? From a lack of confidence to prohibitive management costs, here are the top reasons people are reluctant to invest, and what they can do to move past them. 

People lack confidence

For a lot of people, investing seems like a technical, risky way to manage your wealth. A significant proportion of people lack confidence in their financial acumen, seeing investing as something other, more financially proficient people do. This idea that the average person is incapable of investing effectively is holding savers back. 

This confidence gap is particularly apparent among younger people, a trend that may change as a result of the pandemic. A Moneyfarm study from last year found that 41% of people are more likely to have “saving for a rainy day” as a key financial goal, while 28% said they were more likely to want to “save enough to travel”. This emphasis on saving will, inevitably, lead to more people choosing investment as a long-term way of protecting and growing their wealth. This increased interest in saving should help bridge the confidence gap as more people practice long-term saving. 

Of course, there is a risk involved whenever you invest – there’s never a guarantee you’ll make money and there’s every chance you might lose some. Investing in a diversified portfolio and setting long-term goals, however, can help minimise the risk you take on. 

A wealth manager will invest based on your personal goals and your attitude to risk. If you want to see how an investment portfolio’s risk level affects things like asset classes and returns, check out Moneyfarm’s full portfolio explanation here. If you’re still not sure about investing, you can get in touch with one of our investment consultants, who are on hand to talk you through your options. 

It takes time 

Another clear barrier to investing is the time it takes to get it right. Achieving sustainable, long-term growth isn’t easy; it takes time to build the expertise and the confidence to know you’re giving your money the best chance to grow. How many people have the time to, for example, pore through the data around a particular asset class and perform adequate research to identify it as an opportunity?

So, a lot of people choose to entrust their finances to a wealth manager, who will identify investment opportunities and allocate the funds accordingly. If you’re someone that doesn’t have the time to regularly sit down and analyse the performance of your assets, having someone else take on the burden might be the best port of call. It isn’t necessarily cheap – we’ll come onto cost later – but the returns many miss out on by going it alone can be significant. 

Emotion plays a role

When it comes to personal finance, most people are understandably emotionally invested. Long-term financial planning can help you live an enriching life after retirement, it can make the difference when it comes to buying your dream home, so missing out on opportunities can be difficult. 

Feelings of fear and excitement can affect an investor’s ability to respond rationally to perceived threats and opportunities. We’ve all seen stories of people making huge amounts of money betting on cryptocurrencies and imagined what our lives might be like if only we had foresight. Similarly, people are inclined to avoid buying out of favour stocks, while they tend to hold onto outperforming assets for too long. In many of these cases, it leads to losing money. 

This is where personal wealth management is best left to a professional. Moneyfarm’s team of portfolio managers are highly experienced and invest our clients’ wealth with a view to the long-term – we avoid being distracted by short-term trends and instead focus on the wider market developments that make the difference over time. It can pay to have experienced money managers working on your future, so you can step back and focus on what matters right now. 

The cost is too high

So, we’ve established the benefits of having a wealth manager look after your money. The problem is that, traditionally, wealth managers have been prohibitively expensive. High management and trading fees can eat into returns, putting a lot of smaller investors off. 

The development of ‘robo-advisors’ and the impact of tech on finance more broadly has meant that these costs have come down significantly in recent years. The ability to analyse investment opportunities algorithmically has made the process of investing quicker and more straightforward. This means that, generally, a robo-advisor will be able to charge less in management fees than traditional financial advisors, with many offering additional services on top. 

Management fees at Moneyfarm, for example, start at 0.75%. This can drop to as low as 0.35% as you grow your pot. If you want to see how much you would be paying and its impact on your returns, check out our pricing page here. Where Moneyfarm differs from other robo-advisors, however, is our team of dedicated investment consultants and our team of portfolio managers. In this sense, Moneyfarm is a hybrid between traditional wealth management and modern digital services. For one fee, you’ll get access to both.

FAQ

Why do people invest?

People invest their money for a variety of reasons. For example, they want to grow their money, attain financial security, save for retirement, reduce taxable income, save for a specific goal or unexpected emergencies, and use the power of compound interests. The list is endless.

How can you avoid risk in investing?

There are several ways to avoid investment risk. The first step is to identify your risk tolerance via an investor profile. Then do your due diligence if you are a DIY investor or use a robo-advisor or financial advisor. Finally, make sure your investments are well diversified with a combination of asset classes, and ensure that you have liquid assets.

How can I overcome my fear of investing?

Always start investing with a small amount of money and set an investment goal. Educate yourself on investment options and products, do not invest in something you have no knowledge of. Ensure you know your risk tolerance level and try to understand investment risks. Always pay attention to your investments but do not fear market volatility as the market has its cycles. Lastly, invest long-term, so your investment has time to grow.