Investing is often a crucial part of creating a long-term financial plan. Over the next few months, you can read about the investment essentials you need to know if it’s something you want to start doing or simply learn more about.
Read on to find out what investing means, and why it’s something you should consider if you want to build long-term wealth.
What does “investing” mean?
In simple terms, investing means using your money to buy assets to generate a return over time.
Often, when people say they are investing, they mean they’re purchasing stocks and shares, either individually or through a fund.
When you buy a company’s stock, you’re buying a fractional part of the company and become a shareholder. If the value of the company rises, so too will the value of the stock you hold. You could then sell it for a higher price than you purchased it for to create a return.
Some companies will also share some of the company’s profits through dividends. As a result, investing can also be used to create an income. Dividend-paying companies are often well-established businesses.
There are other ways to invest too.
You may purchase property with the expectation you’ll be able to sell it for more money in the future. Or you may buy bonds, which is where you purchase debt obligations from governments or businesses, in return for interest payments.
Investing could deliver real terms growth in the long run
One of the reasons to invest is that it’s a way to grow the value of your assets in real terms over the long run.
When you place money in a savings account, it earns interest. However, the interest rate is likely to be below the rate of inflation. So, in real terms, the value of your savings is decreasing because you can buy less with it.
Over time, inflation erodes the value of your savings and can really add up.
According to the Bank of England, £10,000 placed in a savings account in 2012 would need to have grown to £12,669.57 in 2022 just to maintain its value. If the interest earned during those 10 years was less than almost £2,700, your savings have fallen in value in real terms.
During a period of high inflation, as we have now, the effects are even more pronounced.
So, how does investing provide a solution?
By investing, you have an opportunity to secure returns that are above the rate of inflation and, so, grow the value of your assets in real terms. Historically, markets have delivered above-inflation returns when you look at a long time frame, even after periods of volatility.
Of course, investment returns cannot be guaranteed and all investments carry some risk. The value of your assets can fall as well as rise. Understanding your risk profile and what opportunities are right for you is a key part of investing.
This is something we’ll cover in next month’s blog, or you can contact us if you want to discuss your options now.
3 times when you shouldn’t invest your money
While investing can be a great way to grow your wealth, it’s not always the right option. There are times when adding money to a savings account or taking other steps will be more appropriate. So, understanding your personal circumstances is essential when you’re deciding whether to invest.
Here are three examples of when investing may not be the right decision.
1. You’re saving for a short-term goal
As investment markets are volatile, it’s usually advised that you invest with a minimum time frame of five years. If you’re saving for a goal that is less than five years away, like going on holiday or buying your first home, a savings account could be more appropriate.
2. You don’t have an emergency fund
Ideally, you should have a financial safety net to fall back on before you start investing. You may not be able to sell assets instantly and you may be forced to sell during a volatile period if you face a financial shock. How much you should have in your emergency fund will depend on your circumstances, but enough to cover three months of expenses is a good general rule.
3. Your financial security would be affected if the value of assets fell
Historically, investment markets have increased in value over the long term. However, returns cannot be guaranteed, so you need to consider the risk of the value of your assets falling or losing your money. If that could place you in a vulnerable position financially, you may want to explore other options.
Contact us to talk about your investments
Over the next few months, check our blog to find out more about the investing basics you need to know, from how to start investing to what you need to consider when understanding your risk profile.
If you’d like to arrange a meeting to talk about your investment strategy, please contact us.
Please note:
This blog is for general information only and does not constitute advice. The information is aimed at retail clients only.
The value of your investment can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
