There are plenty of reasons to invest your money no matter what’s happening in the market in general.
The power of investing is not in when you invest, it’s in staying invested over the long term.
There’s a famous saying: it’s not about timing the market, it’s time in the market.
Investing your money is ultimately about making your money make your more money.
Here are five timeless reasons why you should invest, and stay invested.
Why Invest?
Investing is when you put your money into an asset that you expect to generate gains from.
There are many places and ways in which you can invest.
First of all, investing in yourself is the best kind of investment you can make.
The gains may not be directly financial, but it would be far more valuable.
My focus here is really about reasons to invest in the stock market.
Everyone wants to learn how to invest but fundamentally it’s important to understand the reasons to invest.
Investing can be scary and overwhelming with so many technicalities to learn and understand that most end up not doing it.
Or some end up making investment mistakes, which are usually buying the highs and selling on the low.
If that’s you, I totally understand. I was the same for some time but as I learnt about investing, I found these 5 reasons to invest spurred me on.
5 Reasons to Invest (And Stay Invested)
I want you to win financially.
I want you to achieve your goals and to be able to live your life by design and purpose.
The most important reason to invest is the empowerment to reach your financial goals that will change your life, and possibly your family.
On the one hand there is so much hype around investing being made easily accessible to all.
On the other hand there’s the fear that investing is considered as gambling and money will be lost.
I’m wanting to quiet all the noise and give you 5 solid timeless reasons to invest with a purpose.
Hopefully, you’ll also understand the cost of NOT investing as these reasons to invest will highlight some key points.
1. Inflation
Inflation is the rate at which the cost of living rises (or falls) over time, also called the hidden tax.
It’s the rate that heavily impacts the purchasing power of your money.
A 2% inflation rate means the prices of goods and services today will increase by 2% this time next year.
The truth is, wages don’t always increase in line with inflation which leads to people being technically poorer than they were last year.
I say poorer because you would be 2% down on your money compared to what you could afford last year.
There may be a risk that you may lose some or all of your money on a bad investment.
However you have a guaranteed loss that your money will lose value over time as inflation increases.
Plus savings rates are much lower than inflation, so leaving your money in a savings account may not be advantageous.
To be clear, you should have an emergency fund that you can access anytime should you need it.
I’m talking about the savings you have that goes beyond your emergency fund.
Investing to beat inflation
Investing is one avenue which you can use to beat inflation.
Investing in assets that generate a greater rate of return than the inflation rate is the key.
Over the last decade, equities in the FTSE 100 market have returned around 7% on average per year. With bonds returning around 4%.
The returns being earned are higher than the rate of inflation.
The money invested grows at a faster pace than the rate at which the purchasing power of that money is decreasing.
In simpler terms. If you used to be able to buy something for £1 last year, today it would cost you £1.02.
Where are you meant to find this extra 2p for the same thing you always had?
You may laugh at 2p but multiply those figures by 100 or 10,000 and see the figures for yourself.
The aim to beat inflation means you’re growing your money to retain (and possibly increase) your purchasing power.
A good reason to invest I feel.
2. Compounding Interest – Investment Magic
When you invest you do so with the anticipation to make gains and earn interest on your money.
Let’s say you invest £1,000 into an investment where the interest is paid yearly at around 10%.
After one year, you will have earned £100 on the £1,000 capital that you invested.
In year 2, you will earn 10% of £1,100 , making your interest earned for year 2 £110. That extra £10 in year 2’s interest, is compounded interest.
Compounding interest is when you earn interest on interest.
Each year you will earn interest for the new year, on top of interest earned from the previous year.
If you left that £1,000 invested for 25 years and you didn’t withdraw it, you would have earned £9,834.71 in interest. That’s a 983.47% increase!
If you withdrew the £100 gains yearly, you’d have earned £2,500 in simple interest. Huge difference between the two.
That’s for £1,000, imagine if you invest £10,000 or more.
This is awesome because you haven’t done anything more to earn the additional interest.
Simply invest in an asset, and stay invested over a long period of time.
3. Invest for Growth
Investments give you the opportunity to make your money make more money for you. The gains you could make from investing mean you multiply your money.
You shouldn’t just work for money, make your money work harder for you.
When you invest with the mindset of growing your money you are having a long term view and thinking ahead.
At the very least, investing offers better returns than savings accounts.
Grow Your Money In The Stock Market
When you invest in the stock market you’re really putting your money into companies. You’ll make money when the companies you are invested in make a profit.
Their business growth will result in your portfolio growth through the shares you own. Personally, I believe the average person should consider investing in index funds.
Index funds are simply an investment that holds a large number of shares in one basket. You can have thousands of companies in one investment.
This diversifies your exposure to the market and lessens the risk of losing your money if one company doesn’t perform well.
Traditional index funds are a great option for slow and steady growth over time.
Investing In Shares
Given that you’ve learnt stock-picking fundamentals, you can invest in individual shares that you anticipate will grow in value.This strategy is called growth investing.
This is where you buy the Amazon before it becomes the Amazon we know of today. It’s buying low and selling high.
If you bought Amazon shares in 2015 you would’ve paid around $370 per share owned. In 2020 the value of these shares sits at $3,000 per share.
That is an insane amount of growth over 5 years. The aim of the growth investor is to find companies that have the potential to grow in their market share.
For us to have the freedom and options that we desire, wealth building is a great strategy to do so. Investing is one of the vehicles that can be used to grow your money to attain that wealth.
4. Passive Income
Passive income is when you continue to get money from something long after you’ve put in the work to produce it. Like music artists or actors getting money long after the song or movie was made.
Commonly marketed as making money whilst you sleep.
Investing in the stock market is one way to invest in an asset today that will pay out money to you on a recurring basis.
One key method is through dividend payments. Dividends are a sum of money paid regularly (typically annually) by a company to its shareholders out of its profits.
Dividend Investing
Index Funds
As mentioned earlier, index funds (ETF’s) are a great way to invest in for most people.
Index funds are the definition of passive investing, which can bring passive income.
There are many types of index funds out there, one of them being dividend paying index funds.
These are index funds that are built only with dividend paying companies within their portfolio.
The beauty of index funds is the low fees attached to them, and low fees means more money for you.
Dividend Shares
You can consider dividend investing as part of your investing strategy.
This is where you buy shares in companies that offer dividends to their shareholders. Unlike growth shares, dividend focussed companies don’t seek to grow their market share to increase your share value.
They focus on their profits which are the source of dividend payments.
Important to keep in mind that dividends fluctuate year on year and vary company to company. It’s safe to start with the dividend aristocrats – companies that have a 25 year record of paying out dividends.
Take GlaxoSmithKline (GSK) for instance. Their share price in 2015 was around $40, in 2020 it’s still around $40. The highest it went up to was $47 in Jan 2020. Basically, not growth focused.
But their dividend yield is currently at 4.63%. That’s $1.85 per share owned paid out yearly as dividends (4.63% of $40). You can either withdraw the dividends or have them reinvested to purchase more shares.
Either way it is income you’re getting by simply holding the shares.
For context, if you put that $40 into a savings account with 0.05% interest, you’d have 2 cents after one year. Yeah…
5. Long Term Financial Goals
What are your goals over the next 5-10 years?
Setting goals is such a vital activity in your life and with your money. Goals bring clarity of vision and direction in your life and lead you to thinking strategically.
The way you live, the decisions you make, the people you surround yourself with and what you do with your time. All are driven by goals.
Without any financial goals why are you investing your money? A more real question, without goals what are you doing with all your money right now?
Goals give you a roadmap of your life and your finances with key milestones along the way. This roadmap will in turn enable you to assess what works for you and what doesn’t.
Alongside serving as motivation when you start to lose the excitement and hype of investing for the long term.
For most of us, freedom and options are enough reasons to invest. Having said that, what does freedom really mean for you?
Goals for Investing
Buying a house
If you plan to buy a house over the next 5-10 years, you could consider investments. Remember investing is aiming to grow your money faster than savings whilst beating inflation.
The compounding interest earned then gives you more money that you put towards that house. Which would work out to be more than simple interest from a savings account.
You can check out the Lifetime ISA where you are given a guaranteed 25% return from the government yearly on your deposits. The LISA is not an investment product but the mindset of investing from your part is the key.
Besides where else are you going to get a 25% bump towards your house deposit as gains from your money.
Income Streams
If you plan to generate additional income streams using your investments that is also possible too. You should think about how much you’re aiming to generate and how long you’re giving yourself to achieve that goal.
This would influence the types of shares you buy that could bring in your income amount goals. Alternatively you may conclude that investing in other assets such as property or business fits your roadmap better than the stock market.
Putting money towards building a business is a form of investment as you will reap the gains later on. You could buy low and sell high with physical assets too such as property, cars and clothing.
Retirement
Another big reason to invest is to build up a nest egg for retirement. This may seem far away for you today but you have to think about it.
I see this as investing in myself but reaping the fruits later on in life.
Let’s say you’ll need £2,000 per month to live on. The goal is to build up your retirement pot such that it gives you that income (in dividends and/or interest). I’d be very surprised if the government pensions will still exist by the time we get the retirement age.
Take Action
Which one of these 5 reasons to invest has jumped out to you the most?
Save this list and refer back to when you’re ready to take the leap, or in days where you need the motivation to keep going.
Share this with your friend, family, or partner and let’s make investing a part of our daily chats. Give them something to think about with these reasons to invest.
Let us know how you’re getting along by getting in touch with us, we’d love to hear from you
Knowledge is powerless without action
So take action, and take care
Thando