The following is a guest post from Grant Swann. While we are in the midst of our investment series on Dividends vs Index, this post addresses a basic question on why to even bother investing. Since a shocking 80% of the millennial generation don’t invest, fundamental topics like these serve as guidance for millennials and a reminder for the rest of us. Btw, Part 3 of our Investment Series is coming on Jan 24, watch for it!
With the volatility of the stock market, particularly over the last year where we started weak but ended strong, if you’re thinking about investing for the first time you might be wondering not only where to begin, but is it actually worth it? What’s important to understand is that – like with anything – in order for investing to be worthwhile you must have clear goals in mind, as well as an well thought out investment plan. With knowledge and a healthy appreciation for risk the key to investing, let’s look into the reasons behind why people choose to invest.
Short-Term Investment Goals
Investment goals should be arranged in order of the deadlines set to achieve them. Short-term goals aren’t usually something of high priority, but perhaps a small motivation to invest. They could include a vacation or topping up your savings account, or simply be to invest a small amount of money and grow it. They shouldn’t be the main reason you’re looking to invest, but more a short-term reward – should they be successful. You should never look to investing, particularly with short-term goals as a sole financial solution, for instance if your current monetary situation is unreliable, you’re struggling to get by each month or are in debt. Ensure that the investment you choose to accomplish your short-term goals with does not carry high risk, and – if possible – it’s a good idea that before you even set short-term goals you have an emergency cushion of savings, just in case of any losses. For short-term investment goals avoid stocks, as the minimum time horizon for investing in the stock market is five years.
Long-Term Investment Goals
This is the most critical component of your investment plan, and most likely the motivation behind wanting to invest. These could include a retirement fund, a degree program or business investment. Perhaps you want to set aside an investment to allow for a worry-free retirement, grow a college fund for your kids or expand your business. These goals can be accomplished with investment plans that come with more risk, including stocks. This is because investing over a long period allows you enough time to recoup losses and smooth out your portfolio.
Many people confuse saving with investing. Saving is an important element of being financially sound, but doesn’t necessarily offer returns. With investing you have the potential to grow your capital in a way which savings won’t permit, which, done well, can eventually fulfil your financial goals.
In a nutshell, inflation is the cost of living and includes food, transport, electricity, fuel and healthcare. Frustratingly, regularly topping up your savings account does little to mitigate the impact brought about by inflation. In fact, inflation directly affects your savings, as prices rise every year. The best way to beat inflation is by investing your money in plans that give returns higher than the rate of inflation. Putting your funds in investments such as mutual funds, stocks and others can introduce an element of risk but will put you in a better position to outpace the inflation rate for a long period. Usually equity investments offer returns that are far higher than the rates of inflation, meaning that investors are rewarded with real returns.
Saving for Retirement
Saving for retirement is undoubtedly one of the most common reasons that people choose to invest. For many, unless the company they work for offer a sizeable pension plan, it’s a necessity to set some kind of financial retirement plan. While saving comes without the risk that investment carries, it offers almost no return so if you’re looking to grow your money isn’t a viable option. With investing, even starting with something small means that you’re able to grow your initial investment into what will hopefully be a large sum of money. This offers peace of mind to many in terms of retirement, and is likely to be far more profitable as you’re approaching it as a long term investment. Be sure to have done your research as to what will be best for long term profit, and if need be seek advice from an independent advisor, who will be able to advise you on which investments are best for retirement funds.
Even with short-term goals in mind, investing is a long term pursuit and about risk and reward, and in order to be profitable must be approached in this way. If you’re looking for a short term money solution then investing really isn’t the answer. In investing you’re putting yourself at the mercy of the changing market and are vulnerable to losses. However time will smooth out out losses in your portfolio and compound your returns, so if you approach it as a long term endeavour then you’ll be far more likely to succeed. If you’re unsure about where or what to invest in, consider seeking advice from an independant financial advisor. They will be able to advise on what industries are good to invest in, and will have knowledge and experience of the stock market. If this doesn’t appeal to you, then some reputable stockbrokers and online firms such as CMC Markets offer a free trial or allow you to open a demo account, which will enable you to practise. Even with just a little amount of money to begin with, making that initial investment can be the first step towards creating a better financial future for you.
Raman Venkatesh is the founder of Ten Factorial Rocks. Raman is a ‘Gen X’ corporate executive in his mid 40’s. In addition to having a Ph.D. in engineering, he has worked in almost all continents of the world. Ten Factorial Rocks (TFR) was created to chronicle his journey towards retirement while sharing his views on the absurdities and pitfalls along the way. The name was taken from the mathematical function 10! (ten factorial) which is equal to 10 x 9 x 8 x 7 x 6 x 5 x 4 x 3 x 2 x 1 = 3,628,800.