In this video series I am going to give you an introduction into investing. I am going to begin with why you should think about investing and the things you should consider before you start. I will then take you on a journey helping you to understand investment risk, return and taxation, when you need a financial adviser and when you don’t. This will lead nicely onto looking at pensions versus ISAs and how to begin investing. For those who are not comfortable with the risks associated with certain types of investment assets I will explore ways to boost the money you earn on cash. Finally I will look at investing for your children and how you can even invest to change the world for the better.
This video is going to focus on answering the question “Why should you think about investing?”
First of all let's start with the difference between saving and investing. Saving usually means setting money aside into a bank account, building society account or even a credit union over time. You then usually earn interest on the money that you have deposited. The rate of interest earned will depend on the account you choose and the level of access you want to your money. But often the rate of interest is relatively modest.
Investing is different. Investing involves buying assets or products in the hope that their value goes up over time, or that they can produce an income. The most common types of investments include company shares, bonds (which are essentially loans to companies) and property. But there are a whole range of other assets that you can invest in which include commodities such as gold.
When you save money in a bank or building society the value of your money will not fall, ignoring the obvious risk of the institution failing. But with investing there is always some level of risk, which varies depending on the assets that you invest in. But with this increased risk comes the increased possibility of achieving a greater return on your money, especially over the long term, than can be achieved by simply depositing your money into a savings account. As such investing can also be a powerful tool for building wealth. Of course the flip side is that the increased risk also means that the value of your investments can fall as well as go up. But investment risks can be managed through a process called diversification, which we will talk about later on in the series.
When you put your money in a savings account, the interest rate that you earn is often lower than the annual rate of inflation. Inflation is the increase in the cost of goods and services over time, and in the UK the official rate of inflation is published monthly. The reason why inflation is important is because it can erode the purchasing power of your money and therefore impact your wealth over time. When I talk about the erosion of purchasing power, in simple terms I mean that your money will be able to buy less stuff in the future. By investing in assets that appreciate in value over time, you can potentially outpace inflation and maintain the purchasing power of your money. If instead you save money into a savings account that pays an interest rate below the annual rate of inflation your money is losing value in real terms year on year. The purchasing power is falling. Investing on the other hand can be a hedge against the impacts of inflation.
As such, investing can increase the chances that you can achieve your financial goals, as well as the speed at which you achieve them. These goals can be things like saving for retirement, purchasing a home or funding a child’s education. By starting to invest early, you also have more time to let your money grow and compound. Compounding occurs when your returns are reinvested, allowing your money to grow even faster.
But investing is not just about growing your wealth, you can also invest to provide a passive income stream. A good example of this is the dividend income paid out by companies to their shareholders. On property this passive income is known as rental income.
Historically investing was the preserve of the wealthy or those with a financial adviser but this is no longer the case and is accessible to anyone. This is thanks to a combination of factors including improved technology, increased competition and changes to legislation. A good example of the latter is auto-enrolment whereby employers have to pay into a pension for their qualifying employees. It means that millions of people are already investing, via their company pension, but may not even realise it. What investing isn’t, is speculation or gambling. It is how you responsibly grow your wealth over time while managing risk which is why you should think about investing. But as I will explain in the next video in this series there are things you should consider before you start.
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