Investing is one of the best things which we can do for our future. Advantages are as follows:
‘Investing’ is more than building rainy day savings
On a practical level, saving involves putting aside money today for use in the future. It’s what economists describe as ‘forgone consumption’. In other words, rather than spending all your money, you tip some into a savings account for another time.
Savings is a sensible starting point in investing because it provides the funds you need to purchase a range of different assets. However investing goes one step further, helping you achieve personal goals with three significant benefits.
The potential for healthy long term returns
While saving means setting aside part of today’s money for tomorrow, investing means putting your money to work to potentially earn a better return over the longer term. Different classes of investment assets – cash, fixed interest, property, and shares – typically generate different levels of return (which is relative to the risk of the investment).
‘Growth’ assets, such as shares and property, have historically had the best overall returns of all asset classes but have also had bigger peaks and troughs. As an investor, there is the potential to earn capital growth over the longer term as well as an ongoing income return (like dividends from shares or rent from a property).
‘Defensive’ assets, like fixed income and cash, may not have generated the same level of returns over time as growth assets but these returns have been less variable, with smaller peaks and troughs.
Inflation is the ongoing rise in the cost of living over time, and it can impact on our financial wellbeing.
One way to help outpace inflation – and generate positive ‘real’ returns over the longer term – is by investing in assets that are not just capable of delivering higher income returns but also offer the potential for capital growth.
Earn additional income
It is possible to earn extra income by investing in quality investments.
The return on your investments might be used as a source of regular extra income for day-to-day living. Or you might choose to reinvest the money to further grow (or compound) your wealth.
The bottom line is that savings are important. Depending on your appetite for risk the benefits of investing can mean having more than some ‘rainy day’ cash.
Takes advantage of a growing economy: As the economy grows, so do corporate earnings. That’s because economic growth creates jobs, which creates income, which creates sales. The fatter the paycheck, the greater the boost to consumer demand, which drives more revenues into companies’ cash registers. It helps to understand the phases of the business cycle—expansion, peak, contraction, and trough.
Best way to stay ahead of inflation: Historically, stocks have averaged an annualized return of 10%.1 That’s better than the average annualized inflation rate. It does mean you must have a longer time horizon. That way, you can buy and hold even if the value temporarily drops.
Easy to buy: The stock market makes it easy to buy shares of companies. You can purchase them through a broker, a financial planner, or online. Once you’ve set up an account, you can buy stocks in minutes. Some online brokers such as Robinhood let you buy and sell stocks commission-free.
Make money in two ways: Most investors intend to buy low and then sell high. They invest in fast-growing companies that appreciate in value. That’s attractive to both day traders and buy-and-hold investors. The first group hopes to take advantage of short-term trends, while the latter expect to see the company’s earnings and stock price grow over time. They both believe their stock-picking skills allow them to outperform the market. Other investors prefer a regular stream of cash. They purchase stocks of companies that pay dividends. Those companies grow at a moderate rate.2
Easy to sell: The stock market allows you to sell your stock at any time. Economists use the term “liquid” to mean you can turn your shares into cash quickly and with low transaction costs. That’s important if you suddenly need your money in a hurry. Since prices are volatile, you run the risk of being forced to take a loss.
Potential for long-term returns
While cash is undoubtedly safer than shares, it’s unlikely to grow much, or find opportunities to grow, in the long run.
In the past, investors have found rewards over longer terms with investments that come with a level of capital risk. That means the risk that you might lose some or all of the amount you initially invested. Of course, these rewards are not guaranteed.
Volatility in the stock market, when stock prices change rapidly over a short period of time, isn’t necessarily a bad thing. In fact, volatility can sometimes offer investment managers the opportunity to buy attractive shares at a cheaper price and get better returns in the long term.
In order for your savings to grow in real terms over time, they need to earn a rate of return after tax that’s greater than the rate of inflation.
With today’s low interest rates, it can be difficult to find a savings account that can give you a return above the current inflation rate. So it’s worth considering investments which have the potential to outperform inflation.
Provide a regular income
If you’re retired or approaching retirement, you’ll probably be looking for something can give you a regular income to cover day-to-day living expenses.
There’s a range of investments, including equities, bonds and property, that can provide you with regular income that’s often higher than the rate of inflation.
Tailor to your changing needs
You or an Investment Manager can design your investment portfolio to achieve different goals as you go through life, e.g. you may prefer less risky options as you get older. With careful planning you can tailor your portfolio to reflect your changing goals and priorities.
If you plan on investing over a long time period, you may want to invest in funds that have growth potential, risky sectors such as emerging markets, or private equity where your savings can ride out short-term market changes. If you’re approaching retirement, you may want to invest in more income-focused options.
Invest to fit your financial circumstances
As your financial circumstances change over time, you can change how you invest to suit your needs. You can invest lump sums as and when you can, or smaller regular amounts in a monthly investment plan.
If you have the money available, you can start investing straight away. The sooner you invest, the longer your investment has to grow. Alternatively, investing a regular amount each month can help iron out fluctuations in the stockmarket, particularly in a volatile market.
Our investment options let you top up your investments whenever you like. You can stop, start or change your monthly investments at any time. Also, you can switch between any of our trusts whenever you want. Just write to us and we’ll do the rest.