What is investing?
Think of investing like putting your money in a bank but where the interest you receive is uncertain and varies over time. Over the long-term, the expected interest is higher than what you'd receive in a bank to compensate you for the uncertainty. Historically, the return from investing in stocks/shares has been around 4% per annum higher than putting your money in the bank.
The interest (or return) you receive over time depends on the growth of different companies from around the world. Essentially, you own a part of all these companies, i.e. you have a share in the companies. Your money is being used by these companies to help them create new products, buy new machines, hire talented people and buy materials they need to build their products. By using your money, they should hopefully be able to increase their profits or revenues. As they earn more money, the value of the company increases and as you own a share in those companies, you get richer.
If money is like a 'seed', investing is the act of planting the seed so it grows. Most people just store their seeds and never see them grow.
Planting seeds means they grow into trees and those trees produces more seeds which grow into more and more trees. Before you know it you'll have a forest!
Over the long-term, you should see your money grow. As the money starts to earn a return, you can earn more money on that return. Then, you earn money on that return and so on. This is the wonderful power of Compound Interest.
To give you an example of the power of Compound Interest, let's say you 'gift' of $100 today to a newborn child, it could be worth around $338* when they turn 18. If you invest $10 per month , you'd be gifting them around $4,200 on their 18th birthday. Imagine what they could do with that money! You’d be making a material difference to their lifeves, especially knowing that at the moment less than 19% of 22-29 years have more than £1,000 in savings.
* assuming 7% per annum based on historical averages. The past is not always a good guide to future.
Isn't investing risky?
It is true that the value of the shares varies over time. Therefore, the value of your investment could fall to be below the amount you initially invested. However, there is only risk if the value of your investment falls at the same time you need to sell your investment.
If you don't need to sell, then the change in the value of the investments should not be a real concern. Remember, investing is for the long-term.
The common issue is that people who invest get worried when they read the news and hear how the stock market has fallen in value.They then get worried and sell their investments and lose money. If those people had just ignored the news, they could have seen the market recover and be richer than before.
Trees can get damaged in storms. Many worry and chop down the damaged tree. The key is to leave the tree alone so it can repair itself and grow back bigger and stronger.
If you want a forest, you need to make sure you don't have just one tree, as a tree can die.
Patience and simplicity
The key to good long-term investing is to ignore the news. Or, you can be positive about it. If you take a long term view, when there is a fall in the market, it means you can buy shares more cheaply, so if you have any spare money, that is likely to be a good time to invest.
"Invest when others are fearful"
Also, people lose money by investing in a very limited number of companies. If you invested all your money in one company and that company goes bust you lose all your money. The key is to invest in lots and lots of companies, therefore, if one goes bust only a small fraction of your money is lost. The other companies should more than cover for that loss. This is called diversification. Don’t worry, there are simple ways to get exposure to lots of companies in one go without you having to cherry pick and research hundreds of companies yourself. Our guide shows you exactly how to do this.
When is the right time to invest?
No one knows the right time to invest. Even the people who invest professionally, and claim to be experts, get it wrong more often than they get it right.
Therefore, the best time to start investing is now and the key is to invest regularly rather than invest large amounts at any one time. This approach means you avoid investing at lot of money at the worst possible time.
The sooner you plant your seeds, the more time it has to grow. For a forest to grow you need to be planting regularly.
Don't delay, start investing for your kids today!