On the fence? Nervous about losing money? It's really normal to feel a bit edgy about it. After all, you work hard for your money. Across the UK more than 2.2 million people invest, so you are not alone. This article is here to help reassure you, and go over some of the main reasons why people invest.
Before we begin, there is always a chance that you could get back less than you put in. The best way to avoid this is to invest in many different types of assets, little and often over the long term (more than 5 years).
Here are six major positives for you to bear in mind as you begin your journey...
Positive 1: No savings account can match an investment account👍
In an ordinary year, you'd expect your investments to grow by around 10%[1].
This is presuming that you've gone for the easier option of tracking the global market with a standard mix of funds. Some years it could be less (like this year for example). Some years it could be more. In the end, after many decades, a 10% increase is the rough average.
Compare that to a savings interest rate, which is around 0.09%[2]. There's no need to explain right? The argument makes itself.
Positive 2: Investing protects your money from inflation 👍
50 years ago, the average weekly wage was around £32[3] and a loaf of bread cost 9p.
Imagine what the situation will be like 50 years from now....
Will your savings really be enough to see you through retirement, at the rate of inflation? Or will a week's wages today be the cost of a pizza delivery tomorrow?
Investing in shares and many alternative assets (like buying a property) protects against inflation. Bonds and debt, however, don’t have this superpower.
Positive 3: Your money builds up without you doing anything 👍
Compounding returns. Difficult to explain, stunning to witness. It's the way that profit makes more profit.
I’m going to explain it through the medium of a snowball on top of a hill.
You make a little snowball and roll it down a massive snowy hill (you buy some investments). As the snowball rolls, it picks up other bits of snow which stick to it (you make more money over time). The snowball gets bigger, it picks up even more snow (you have larger investments, and so you have larger profits). The snowball gets massive, rolling faster and faster with momentum (your investments grow exponentially, with higher profits over time).
Compounding returns is the bedrock of investing, it’s a big part of how the money is made. All you need to do is invest in a good range of things and don’t sell until at least five years. The longer the better.
4. Smoother performance with regular little payments 👍
Pound-cost averaging, or as most of the world call it, “dollar-cost averaging” means that you keep squirrelling away money into your investment account, throughout the good times and the bad. It's regular investing, little and often.
Two major economic benefits come out of it:
Firstly, your investment pot gets bigger
Secondly you pick up some bargains in the rough times
One massive psychological benefit happens too, your investment performance will look smoother and feel less stressful in the downturns.
Positive 5: Avoid missing out 👍
Time in the market is better than timing the market. By putting your money to work sooner, you give it the maximum chance of growing.
As the mantra goes, you need to be in it, to win it. So by keeping your money in a savings account, you could be missing out on profitable moments in the stock market.
Also consider your own "time/opportunity" cost (that's the economic term for FOMO - fear of missing out) . What would you rather be doing with your time if you had enough money to retire early? To find out, you'd need to start investing sooner.
Positive 6: Higher stakes are not necessarily a bad thing 👍
The financial term is “risk/return trade-off” which sort of does what it says on the tin. Less risk = less reward.
Speaking for myself, I always opt for the highest possible risk level with my investments. Why? Because I’m planning to invest for several decades and I want to use the money to buy a property. I couldn’t do that if I went for a low-risk option, because the maximum potential profit wouldn’t be enough.
It’s like anything in life really - like love for example…. Would you take a risk for that? How far would you go?
I’m a believer in “go hard or go home”. Everyone is different, but for me, I wouldn’t invest in low-risk bonds or debt unless I was planning to sell everything and take the cash very soon.
So there you have it! 6 simple but compelling reasons to consider investing, and hopefully settle your stomach if you've got first time nerves. If you feel ready to get started, it's time to start building your investment portfolio.
I hope you find my article useful, please be aware that this is not personal financial advice. Everybody's situation is different, and you should do what's best for you and your goals.
[1] https://www.nerdwallet.com/blog/investing/average-stock-market-return/ [2] https://smartasset.com/checking-account/average-savings-account-interest [3] https://www.theguardian.com/uk/2004/mar/05/health.drugsandalcohol [4] https://www.ons.gov.uk/economy/inflationandpriceindices/timeseries/czoh/mm23