-What is investing?
-The dangers of savings
-What are your goals?
-How much do you need to start
-Beating the market?
-Choosing stocks, or funds
-What is the meaning of “passive” and “active management”?
-Leveraging the power of compound interest
What Is Investing?
Investing is when an individual provides an entity with funds aimed at growing their business. If the business grows using this capital, the business rewards the investor with a return.
You can invest in many different asset classes. The most common type of assets classes are stocks, property and bonds.
In this article, we will explain stock investments
When you invest capital in stocks, companies use those funds to grow their business. They might use it to build infrastructure, increase their marketing spend, or develop a new product range.
If you want to start investing in 2017, you can invest in any of these asset classes. As a general rule, I think the stock market is the easiest to understand for beginners.
When you own a “share” or “stock” of a business, it means you own a small share of the company and by extension the company’s profits.
The ultimate aim of investing is to get a return on your initial capital investment.
There is no singular purpose for investing – it depends on your personal goals. Here are some reasons people like to invest.
People mainly invest, because they want to either:
-create a fund to live off when they retire
-grow their savings
-prevent inflation from eating into their savings
In today’s economy, people probably think that the stock market is a place where you loose money. In fact, the opposite is true.
The dollar, the euro, the yuan, the yen…
Mainly of the world’s largest currencies are inflationary. This means they loose value over time. When prices around the world increase, the value of the currency actually remains the same.
If you had $100,000 in 2008 and you did not invest it in the stock market. It would only be worth $80,000 today – inflation would have eaten up the remaining 20%! If you had invested it in the stock market in 2008 instead, it would be worth roughly $150,000 in 2017.
This is even after the greatest financial crash in over a hundred years!
Even if you are not sure what your life goals are yet, remember: investing is historically proven to outpace inflation!
How Much Money Do I Need To Start Investing In 2017?
There is no fixed amount of money needed to start investing in 2017 – you could start with $100, or you could start with $1,000,000.
In order to make sizeable returns however, you need a sizeable sum of money to start.
If you have a sum less than $5,000, you should probably invest in yourself or a side-business instead. It would not make much sense investing such as small amount.
The reason for this is simple. Investing is a brilliant way to grow wealth and protect assets. However, the growth the capital is normally quite slow.
Where Can I Invest To Beat The Market?
“Beating the market” is a phrase used to denote an individual outperforming the average return other investors have received in a given time frame.
If American companies grew by an average of 7% in 2015, an investor who had a return of 8% would have “beaten the market”.
Most people think that “beating the market” is done often. This is not the case.
Most professional investors fail to “beat the market” over a long period of time. An in depth study published in 2015, found that 98% of equity funds failed to beat the market over ten years.
Fund managers who believe they can “beat the market” are known as “active managers” and their style is known as “active management”. The alternative to active management is “passive management”.
A “passive” strategy invests in holdings that return the average return of the market each year – they do not try to beat it.
Should I Invest In Active Or Passive Investments?
There is no correct answer to this. If only 14% of active managers can beat the market over ten years, this figure is likely to decrease to far below 14% over a twenty year period.
In this context, a passive investment strategy is probably the best option.
The best vehicle for passive investments are low-cost index funds. They track the performance of a marketplace and deliver the market’s returns each year.
If you invest in passive investments, there is one investment strategy many investors use over a long period of time to generate explosive returns. It has worked for Warren Buffet since the 1950s and it will work when you start investing in 2017.
Its called compound interest. Compounding occurs when you re-invest a stock dividend into the principal sum. Its easy to explain through an example.
Lets say you invest in a tech company called Technica LTD in 2003. You buy 10 shares priced at 10$ each ($100 worth of shares). The next year the price of the shares rises to 20$ a share (100% rise in price) and the company pays income from those shares (lets say the income is 10%).
To be clear – your holding is worth $200 and you receive a 20$ dividend.
You re-invest that 20$ back into the company and it increases to $440 next year (another 100% increase). When the company pays out a 10% dividend of $44 and you re-invest it again.
Each time you re-invest the dividend or income back into your stocks, you are compounding your returns.
In the short term, this is not very significant. In the long term, this is an incredibly powerful tool. We will show this through another example.
If you started investing with $20,000 and you:
-invested $12,000 back into your fund each year at a 7% return
-re-invested all your dividends
You would have earned roughly $2,996,000 after 40 years and without having to do anything! A 7% return over forty years is not even uncommon – its the average return over the history of the American Stockmarket!
The stock market can be a very cruel arena for people who have not done their research and people who have taken on risks they cannot afford.
It is also cruel to people who try and outsmart the market. Statistically, it is very difficult to achieve and it would be far more practical to just invest an index fund.
If you want to start investing in 2017, or ever, you would generate greater returns by investing passively. §§
If you have any questions about investing in 2017, join the forum found on the front page of the website.
We do not claim to be experts, but there could be someone there who can offer a different perspective on an issue you are having.
If you are still interested in investing, read our article on index funds.