Building a long-term plan: time in the market and avoiding emotional traps

The biggest risks for most new investors are not market crashes but their own reactions: waiting too long, chasing hype or selling in a panic. A simple plan, started small and kept up, beats clever timing.

Start with the foundations

• Before investing, the FCA's checks ask: will I need this money soon, do I understand the investment, does it match my risk tolerance, does it diversify me, and am I OK with losing some money?
• Have an emergency fund in place first; the FCA's rule of thumb is at least 3 months of living expenses.
• Clear expensive debt before investing; few investments reliably earn more than high card interest costs.
• The FCA says that if you invest for the long haul you should be prepared to invest through short-term ups and downs.

Time in the market versus timing the market

• Charles Schwab studied five hypothetical investors who each received 2,000 dollars a year for 20 years (2005 to 2024), investing in the US stock market, before taxes and fees.
• The perfect market timer, who somehow invested at the lowest point every year, ended with 186,077 dollars. The investor who simply invested on the first day of each year ended with 170,555 dollars, only 15,522 dollars less.
• The investor who spread purchases monthly ended with 166,591 dollars, and even the investor with the worst possible timing, buying at each year's peak, ended with 151,343 dollars.
• The investor who waited in cash for the right moment ended with only 47,357 dollars. Schwab's conclusion: 'Procrastination can be worse than bad timing.'
• This is one historical period in one market. Schwab notes stock investing carries no guarantee, and a long weak period like the 1960s to early 1980s could happen again.

Consistency: regular, automatic investing

• Investing a fixed amount on a regular schedule is often called dollar-cost averaging; Schwab presents it as a sensible compromise for people uncomfortable investing all at once.
• Regular investing builds the habit and removes the temptation to guess the 'right' day.
• Automate it, just like your savings, so it happens on payday before you can spend the money.
• Increase the amount when your income rises, for example when you start a part-time job or graduate.

Behavioural traps to recognise

• FOMO (fear of missing out): buying something because everyone online is excited. The FCA found that only 20 per cent of young investors surveyed could discount investment hype.
• Panic selling: Vanguard's 'Unlucky Jim' example shows that selling during a fall would have 'locked in losses and missed out on the subsequent rebounds'.
• Short-termism: the FCA found only 2 per cent of the 18 to 40 year olds it surveyed had an investment time frame of more than 5 years.
• Overconfidence: a few lucky wins can make you take bigger risks. Keep high-risk bets to a small slice; the FCA suggests around 10 per cent even for experienced investors.
• Ignoring warning signs: the FCA found men were more likely than women to go ahead after spotting a warning sign (39 versus 28 per cent). Anyone can fall for it, so slow down.

Write your own simple plan

• Goal: what is the money for and when will you need it?
• Foundation: emergency fund target and date to reach it.
• Method: how much you will save or invest each month, and on which day it moves automatically.
• Rules: 'I will not sell just because prices fall', 'I will check a firm's licence before sending money', 'I will review my plan once a year, not every day'.
• Support: as a minor, any investment account needs a parent or guardian; for personal advice later, use a licensed adviser whose registration you have checked.