• Hannah Duncan

7 reasons to start investing sooner

On the fence about investing? Opening an online stocks and shares ISA account is straightforward and becoming an investor is hassle-free. Here are seven excellent reasons to start investing sooner.

1. Cash savings have low growth potential … can you afford not to?

The most compelling argument for investing is the simplest. You cannot reach the same real-time (inflation-adjusted) growth potential with cash savings. In fact, it’s unlikely that you will reach any growth potential with cash. An emergency cash fund is sensible, but for your long-term future, ask yourself whether your nest egg could be doing more for you. For medium to long term goals (3+ years), investing your money (particularly with regular top-ups) has significantly more potential for growth than saving. Of course, with investment comes risk and there are no guarantees which is why you should only invest in assets you are comfortable with. To find out more about the difference between investing and saving for a long term goal, see a breakdown in this article on affording retirement.

2. Inflation protection … will your money be worth the same 20 years from now?

It’s been nearly 15 years since a Freddo bar cost 10p (now 25p) and holidays abroad are not getting any cheaper. Inflation has a very real impact on your cash savings, and as it continues to outpace interest rates you could say that cash is actually going backwards. If you choose to keep your money in cash over the long-term, you will find that it will most likely be eaten away by inflation. While this may not seem like a pressing issue now, consider the older generations living in Britain today whose cash savings didn’t retain their value. 50 years ago the average weekly wage was around £32 and a loaf of bread cost 9p (as of February 2019 the average sliced loaf is £1.09). Imagine what the situation will be like 50 years from now. Consider if your savings will really be sufficient to see you through retirement. You can help protect your money from inflation and keep the value of your cash with an exceptionally diversified investment portfolio built to withstand pressure. Years from now you could be thanking yourself as your money not only retained its value – but actually grew.

3. The power of compounding… are you profiting enough from your profits?

Once your money has been invested, the profits are reinvested and reinvested and reinvested continuously. This means that your money has the chance to snowball, gaining momentum with size. It is one of the most fascinating parts of investing and even Albert Einstein had a thing or two to say about compounding, describing compound interest as the “eighth wonder of the world”. He went on to add “He who understands it, earns it; he who doesn't, pays it”. Give your money a chance to work harder and give yourself the potential afford your dream sooner by opening a stocks and shares ISA account conveniently online.

4. Pound-cost averaging … are you taking advantage of market movements?

Several benefits open up by making smaller, regular contributions to an investment portfolio as well as investing a lump sum. Firstly, you feel it less, as with regular contributions the amount of money you invest grows steadily. Secondly, it smooths the highs and lows of your portfolio, meaning that you can buy more investments for your money when the market dips and less when the market peaks. You take part in market opportunities throughout the year, while also benefiting from the effects of compounding. Pound-cost averaging means that with smaller regular amounts of money, you could get a get greater peace of mind.

5. Time / Opportunity cost … what are you missing out on?

Time in the market is better than timing the market, by putting your money to work sooner, you give it the maximum chance of benefiting from opportunities. As the mantra goes, you need to be in it, to win it. By keeping your money in cash, you could be missing out on profitable moments in the stock market. Also consider your own time opportunity cost. What would you rather be doing with your time if you had enough money? Travelling? Retiring? Working less? Could you afford to do it sooner if you had more money? Make the most of what you already have, and get your money working for you.

6. Risk-return trade-off… adjusting your risk tolerance to your comfort level

Worth delving into is the risk/return trade-off, which makes financial risk a compelling reason to invest for some people. Of course, the other side to taking higher risk is that there is a greater chance that you will not get your money back, which is why understanding risk and return to make informed decisions is essential before you start investing. The risk-return trade-off means that assets which have more chance of falling short become more profitable if they succeed. Some investors deliberately and primarily invest in only very risky assets, such as start-ups (For example, Angel Investors), because when they go well, they go very well indeed. Nearly every major company began life as a high-risk start-up; if you had invested $220 in Apple shares in 1980, you would now have $124,443.20, not including dividends. When you take diversified risk, you put yourself in the position to gain potentially higher returns, than with low risk assets such as investment grade bonds. Meanwhile when it comes to your hard-earned money, there is no trade-off to inflation, if all your cash erodes in value, there is no upside.

What is investing and how can it get your money working harder?

The world of investing is an extraordinary opportunity to get your money working harder for you. Investing essentially means that you buy slices (shares / stocks) of companies (known as equity) or help out organisations or governments by loaning them money to grow or improve (known as bonds). By automatically reinvesting your profits from equity (dividends) and bonds (coupons or interest) your pot of money grows. If you top up every month as you get paid you continue to grow your money and take part in a wider spread of market opportunities at different stages in their lifecycle, and at different prices (pound-cost averaging).

All investment carries risk and it is important you fully understand these risks and are willing to accept them. You may get back less than you invested. The tax advantages of ISAs may change in the future and also depend on your individual circumstances.

Opinions given within this article are the authors own personal views. The views and opinions are effective from the date of publication but may be subject to change without notice. The facts and figures cited are correct as at date of publishing. This article is not intended to constitute personal advice and no action should be taken, or not taken, on account of information provided.

© 2020 by Hannah Duncan