Common Questions about Investing
Helping parents gain confidence to invest for themselves and their kids.
1. "What is investing?"
Saving for the long-term
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. 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.
2. "What are the benefits of investing?"
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!
Using Money to make Money
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.
See how much your kid could have when they could have when they reach 18 years old.
And ... now imagine what they could do with that money! You’d be making a material difference to their life, 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.
Estimated amount at 18*:
3. "What are the risks?"
Risky if you need to sell!
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. If you need the money in the next 5 years, don't invest.
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 trees. The key is to leave the trees alone so they can repair themselves and grow back bigger and stronger.
4. "Do I have to pick companies to invest in?"
If you want a forest, you need to make sure you don't have just one tree, as a tree can die.
No you don't!
Picking which company is going to do well is really hard. Even the professional stock pickers get it wrong more often than not. Also, if you invest all your money in one company and then that company goes bust you lose all your money. The alternative is to invest in lots of companies, therefore, if one goes bust only a small fraction of your money is affected. 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.
5. "When is a good time to invest?"
No one knows, so start now!
No one knows the right time to invest. Again, 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 your forest has to grow. For a forest to grow you need to be planting regularly.
6. "How much work is it to invest?"
For a tree to grow, just leave it alone!
Once set up, little work required
Investing done well should be super easy and admin free!
People have the impression that investing is "buy, buy, buy!" and "sell, sell, sell". That type of investing is for those that are trying to beat the market and feel they can make some money quickly. The truth is that most of the people doing that lose money over the long term.
Investing at its purest is just finding a fund which invests in the whole market, automatically adding more money in each month and then, leaving it alone.
It's not the most exciting strategy but it is easy and, the best strategy. It's a bit like putting money into a savings account each month - the difference being the amount you get in your savings varies but if you leave long enough your investment fund could be much higher.
Don't delay, start investing for your kids today!