As the end of the tax year approaches, Fashion Insiders spoke to Emma Thyer, from savings and investment service Nutmeg, for some guidance on investing for self-employed professionals.
Being a self-employed fashion professional means you need to have a much better handle on what happens to your money. Paying out for tax and National Insurance contributions, as well as paying into a pension scheme are taken for granted by most as something that is automatically handled by the employer – but when you work for yourself these things need to be carefully considered. Investing for self-employed people can be much more difficult than it is for an employee.
Investing and saving for your future are just two more of those things which, as a freelancer, you’ll need to keep on top of.
Even though your income can be variable, it’s a good idea to set a figure that you’d like to regularly invest – it might be a monthly amount, for example. If you do this and gradually build up an investment pot, the effects of compound interest will help your investment to grow over time, which will give you a better result than investing the same amount of money as a lump sum.
Taking a Long-Term View
Investing is a long-term proposition. You should be looking to invest for a minimum of three to five years but ideally longer, such as a 10 or 20-year horizon.
This is because volatility in the stock markets is commonplace, and investing for a longer period of time gives your investments more of a chance to ride out these bumps in the road.
For example, it’s not uncommon for the value of a medium-risk portfolio to lose a couple of percentage points in one week, or even more over a couple of months and yet still make a healthy profit over a full year. These small dips become less significant the longer you invest for.
As Nobel Prize-winning economist Paul Samuelson once said: “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
Setting Investment Goals
It’s always easier to put money away if you’ve got a particular goal in mind. Having a clear picture in your head (or on your desk!) helps to act as a commitment device and makes it easier for us to make the sacrifices necessary to save rather than spend – such as deciding to forgo that latté in the morning.
A longer-term goal with a defined time frame and a target figure, such as saving for your children’s education or a comfortable retirement is likely to yield better results. That said, any goal is likely to help you develop better saving and investing habits – whether it’s a deposit on a property or a wedding fund.
Resisting The Urge To Tinker
Whatever you invest in, whether you decide to go it alone with the stock market or invest with a discretionary manager – such as Nutmeg – resisting the urge to make too many changes to your investments is important.
History shows it’s practically impossible to second-guess stock market movements – trying to sell high and buy cheap just doesn’t work – even the most successful investment managers get it wrong – a lot. In their Quantitative Analysis of Investor Behaviour (2012), financial research organization Dalbar highlighted the futility of attempting to beat the market. The study found the average equity investor made a 3.49% annual return over a 20-year period, whilst the Standard & Poors 500 market earned 7.81%.
Related reading: How to Legally prepare for Investment?
You are far more likely to reach your long-term goals by investing through a diversified portfolio that’s well managed and regularly re-balanced, staying on track with any changes in your circumstances. We know saving isn’t easy. You might have a mortgage and kids to bring up as well as the responsibility of running your own business, but the undeniable truth is that the earlier you start putting money away the better off you’re likely to be. Even small amounts can make a big difference over time and the benefits of compound returns can really help your portfolio to grow.
Do you have tips and advice you’d like to share with other fellow self-employed fashion professionals? Let us know in the comments below.