Investing your money means buying an asset that you expect will grow in value over time. It is a more involved way of growing your money than simply placing it in a savings account. A typical savings account will pay you a “risk-free” rate which in the past decade in the UK was as high as 3%. Recently those rates have plummeted down to near zero . This is a guaranteed return with no risk of losing any money while your money sits in the bank.
Investing on the other hand is associated with risk. The more risk you take, the higher the potential return. However, investing is not the same as gambling, and can be a very prudent way to manage your money when done correctly. Over the past 10 years, the FTSE100 which tracks the 100 largest UK companies in the stock market has returned 8% per year. This is roughly the same on average with the S&P 500 which tracks the 500 largest US companies in the stock market.
Generally you should aim to invest your money once you’ve first created an “emergency fund” that could immediately cover your monthly expenses in case of an emergency for a reasonable period of time, typically 3-6months. This amount of money you would preferably keep in an easy access savings account so you are guaranteed to have full access to it at any time. Beyond that, it’s reasonable to start investing the rest of your money, beyond whatever you’re saving for specific goals or purchases.
There are a few things to consider when you’re looking into investing, but if there’s one thing you keep from this guide is this: the longer your investment horizon, the lower the risk. If you seek quick gains you are taking on more risk, whereas investing over the long-run is more stable and reliable. Therefore, it’s important to have your emergency fund settled so you can invest with a more long term approach and not be forced to pull your money out. Because even if there is a “stock market crash”, if you weather it, the market will recover and over time you will have gained.
Investing is primarily associated with the stock market and for this guide we’ll be focusing on that. What you might ask next is what stocks should I invest in? Here’s something you don’t hear often, because if you did, many fund managers, analysts, and investment bankers would be out of work. Active investors, that is those who pick and choose stocks, do not perform better than the market. Enter passive investing. This means buying into an index fund, namely a collection of stocks that represent the whole market. These have always performed better for investors. All the talk and fuss about which is the hottest new stock is very often pointless. As an everyday investor you’re much better off taking a “passive” stance through investing in index funds or mutual funds, which grow over time. This way of investing also has tax benefits.
Does this mean I shouldn’t invest in individual stocks?
By all means, once you get familiar with a platform, you can invest in specific stocks. “Value investors” like to buy into companies they believe in. It’s becoming increasingly popular for millennials to invest based on brands that they see are becoming popular. And this isn’t a bad metric for investing, even if you’re not digging into the financials of each company. Markets move both on the basis of news, numbers, and sentiment. Getting a sense that a company is gaining traction in popular culture is not a bad way to do a bit more research on that company and decide to invest in it.
Some people take a lot of interest in investing in stocks, but it’s not for everyone and it certainly requires time. It’s not so important to get involved in that way of thinking and investing on a daily basis. It’s a lot more important to get started and put your money in the long term growth of the market as a whole.
Illustration by Julia Boldysheva
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