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The basics of investing – what's changed and why?

We take a look at how technology has changed the way we invest our money.

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

Investing is very different now compared with decades ago.

The introduction of the internet and state-of-the-art trading systems have modernised the investing landscape and the way we invest our money. It's now easier to trade than ever before, the types of investment available span much wider, and there are simply more of us in the investing space.

These might sound like positives, but have these innovative interventions made us better or worse investors?

We take a closer look at what's changed across the investing landscape and whether the basics of investing have stood the test of time.

This article isn't personal advice. If you're not sure what's right for you, ask for financial advice.

Out with the old, in with the new

The means of investing in your favourite stocks has transformed over the years.

In the early 1900s, the process of buying and selling shares was long-winded and took hours. Investors had to call a stockbroker to place their instruction, the stockbroker would then call a runner in London, who'd then go to place the trade on the pit-style trading floor at the London Stock Exchange.

Investing was less fashionable back then and tended to be reserved for wealthy individuals. It's probably where the impression investing is for the rich and famous originates from. But these days, that's a myth.

Investing in today's world is accessible to almost everyone, with fewer obstacles to getting started.

Online investment platforms and mobile trading apps make it easy to open an investment account and trade within minutes. All you need is the internet and a few pounds to call yourself an investor in 2021.

Thanks to vast improvements in technology, the days of trading bells and frantic trading floors have all but disappeared. Share trading has, like most things, switched to digital with more advanced trading systems which can process millions of trades in a single day.

Investing in a digital world has become faster, simpler and cheaper. But is this good or bad for investors?

Evolution of the investor – for better or worse?

As the investing environment has evolved, the traits we carry as investors have evolved as well.

Some for the better, some for the worse. We'll start with the latter.

Investors are trading more frequently and holding shares for shorter time periods. Lower dealing fees and being able to buy and sell investments at your fingertips has meant investors take less time making their investment decisions. This can cause knee-jerk reactions to blaring market headlines, especially when markets start to fall and the emotional side of investing takes over.

Unfortunately, more efficient processes and lower costs also makes it much more enticing to day trade.

Day trading involves dipping in and out of shares, trying to try time the market and take advantage of price movements. This is a high-risk approach, and even the most sophisticated investors with cutting-edge technology hardly ever get it right consistently.

It's important to ask yourself, would you place the exact same trade if you were investing in the 1900s? What about if the trade cost £50 in dealing fees or took more than 20 minutes to go through? Day trading might be a viable strategy, but at HL we prefer to make our investments work for us, not the other way around.

What about the good stuff?

It's now more important than ever for people to take control of their savings and investments. And they are, with 7.1 million new investment accounts opened in the 2020/2021 financial year.

We see greater levels of engagement with investing as a positive outcome. It gives people the opportunity to make more of their money. People that hold their money in cash savings, rather than investing in the stock market, are more at risk of seeing the purchasing power of their money eroded by inflation – the rate at which money loses its value. That said, it's important to keep a cash buffer for any unexpected emergencies – we think around three to six months' worth of essential expenses is about right for most people (one to three years if you're retired).

Remember, unlike cash, investments can rise and fall in value, so you could get back less than you invest.

Similar to the way we use online banking, the switch to online investment accounts has enabled investors to stay in touch with their portfolios. Less time spent rummaging in dusty storage cupboards for old share certificates, means more time can be spent reviewing your portfolio's performance, and rebalancing in areas where it's needed.

If you haven't rebalanced in a while, you could be missing a trick.

Rebalancing involves selling investments that have performed well to buy other investments that have performed poorly. This helps keep your overall portfolio in good shape, even if the size changes. It might sound counterproductive, but top performers can come in waves.

It's become a long running debate that regularly rebalancing your portfolio could improve returns over the long term. While the jury might still be out, rebalancing does, however, encourage good discipline. It's almost certainly an effective way to control the level of risk in your portfolio.

There's no hard-and-fast rule on how often you need to review, and potentially rebalance, your portfolio, but we think twice a year is sensible – once a year at the very least.

How to review your portfolio

It's difficult to say whether we're better investors now than in the past. Lots of investors have different approaches. But those who use advances in technology to their advantage, while sticking to the basics and avoiding the pitfalls of overtrading, stand a better chance at investing success.

The basic fundamentals are the same

Even with all the adaptations to how we use technology to invest, the basic fundamentals of investing are as current today as they were in the early 1900s – they've stood the test of time.

Long-term investing is one of those fundamentals – that's at least 5-10 years, ideally a lot longer. But despite a long-term view being an essential tool in any investor's toolbox, it's something that can get overlooked in modern-day investing.

Scroll across to see the full chart.

Chart showing FTSE 100 index 10 year rolling returns (with income reinvested)

Past performance isn't a guide to the future. Source: Lipper IM, 31/12/1990-31/12/2020. Figures exclude charges and taxes.

As you can see in the graph above, investors that played the long game by investing for ten years were rewarded in all the periods since 1990 – with an average return of 95% with dividends reinvested. Past performance isn't a guide to the future.

While we know nothing's guaranteed in investing, it's hard to imagine a time in history where time and patience won't be two key ingredients for investing success. It's why sometimes investing is a case of mind over matter.

Mastering the mind

Since the pandemic, investing has become about as commonplace as a Zoom video call or getting a new pet. Lots of these newer investors are younger and braver (they're happy to accept more risk), and are leaping into the investing world with no previous experience or knowledge.

We invest to make our lives better, but it can quickly turn ugly if you don't hammer down the investing basics first. The old adage 'Don't try to run before you can walk' springs to mind.

Remember, stock market ups and downs are part and parcel in investing. You need to be comfortable that you might not get back what you put in. Understanding how to handle any bumps in the road and the human psychology behind investing is essential to your chances of success.

Even for the more experienced investors, refreshing yourself on the nuts and bolts of investing can be good for the health of your portfolio.

Find out more about common investing behaviours



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Explore our Investment Times autumn 2021 edition for more articles like this.

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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