For most people, the idea of investing sounds out of reach, an impossible dream reserved for the elite.
But, investing is no longer just for the wealthy, it’s for everyone, whatever their income or savings. It’s easier than you might think and you don’t need much money to get started.
But why should you take the plunge and start investing and why are investments important?
Six reasons to start investing
1. To attain financial stability
Being financially stable is a goal most people hope to achieve. People in their 20s and 30s want to take that all-important step onto the property ladder. Parents want to secure their children’s futures, perhaps by paying for college fees.
Many worry about paying for retirement (and often a 401k or mandatory retirement plan just isn't enough!).
You can cut out this uncertainty by investing in your future and your family legacy.
2. Money in the bank is always losing value
In 1970, $1 would buy ten loaves of bread. Today, $3 would buy one loaf of bread. Effectively your dollar buys far less than it did 50 years ago.
This is ‘inflation’ or the ‘purchasing power of money’. The ‘inflation rate’ is a way of representing the percentage change in the average price of a good or service. If inflation is high, you can buy less for the same amount of money as time passes.
When you keep your money in a bank account, you may think it's growing, because it's earning interest. But that’s not taking inflation into account.
Here’s an example: If your bank account pays 1% interest each year and you invest $100, it will have increased to $101 at the end of the first year. However, an inflation rate of 5% would reduce the effective value of your $100 to $96 (after interest). Your savings have decreased in value.
Inflation is currently 7%, its highest level since the early 1980s. Given the average interest rate on savings accounts is 0.1%, the real value of your savings could decrease by nearly 7% every year in a bank account.
To make sure you aren’t losing money, you’d need to be making a return that is higher than the inflation rate. This is where investing comes in.
3. To achieve your dreams
Investing lays the foundation for a comfortable life. For some, it’s buying a home or starting a business. For others, it’s sending their kids to college or going on that holiday of a life-time.
Whoever said 'money can't buy happiness' is right — it can't. But it does help by making more things possible.
It can improve your standard of living and allow you to realize your dreams. You could use the profits made from investing to buy your forever home, learn to waterski or just treat yourself to the watch you've always wanted...
4. To provide a passive source of income
You’ve worked hard for your wages. Don’t leave them in a bank account, earning minimal interest and being eroded by inflation. Be like the super-rich and look to make superior returns through your investments.
Invest. Sit back & relax. Make money.
5. Time is your friend
When investing, the longer you own (“hold a position in”) a stock, the better your chance of making a higher return. You are losing potential future profits if you delay making that investment.
According to Goldman Sachs, the average annual return for the S&P 500 (the largest 500 companies listed on US stock exchanges) was 13.6% from 2010 to 2020.
Based on these returns, if you’d invested $1,000 5 years ago, it would be worth almost $1,900 today. But, if you’d invested it 15 years ago, it would now be worth over $6,700, almost seven times your initial investment. All thanks to the power of compound interest.
Investing over a longer period of time also averages out any ‘ups and downs’ of the stock market.
The highest return for the S&P 500 was 32% in 2013 compared to a 4.4% loss in 2018. Investing over a 10-year period allowed investors to receive the average return, rather than trying to time investments to avoid dips in the market.
As Charlie Munger, the Vice Chairman of Berkshire Hathaway, said,
“The big money is not in the buying or selling, but in the waiting.”
6. Most wealthy people already do it
Think of a rich person you look up to. Chances are, they didn’t get to where they are now by putting their wages in a low-interest bank account. They invested their wages to maximize the potential future value.
Business Insider interviewed one hundred millionaires about their investment behaviors. Over 60% had a second source of income to their main job, these included:
- Equity investments, including dividends
- Real estate
- Side businesses
Even when their wages were modest, they were disciplined about saving and understood how small investments can grow into a substantial pot of money.
Most of the millionaires’ investments were held in simple low-cost funds that track the stock market, rather than complicated investments.
Key takeaways
At current interest and inflation rates, money in savings accounts is effectively reducing in value every year. Investing is the best way to make a return that beats inflation.
Investing is open to anyone. There's no secret club, required amount of money or huge barriers stopping you.
Where can I learn more about investing?
Consider exploring a stock market course, or reading an investment book. You could also consider using an investing simulator. And if you don't know what to invest in, that's where we come in.
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Features
- Receive a single stock recommendation every month, curated by industry experts, presented in a clear and focused one-page memo
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Why Opens?
- Our internal strategy team is made up of sector-specific analysts & industry veterans with years of practical experience
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So, why not visit our website to learn more about Opens?
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