Why do we invest?

If you’re new to investing, you might be wondering what it’s all about. Let’s start by explaining why we do it in the first place.

There is a lot of noise and jargon around investing. This may have put you off in the past, but it really doesn’t need to be complicated.

So, let’s keep it simple. For most people, investing comes down to wanting to get more from their money than if it was left in the bank. This allows investors to grow their wealth for the future to help them achieve their financial goals.

What is an investment?

Simply put, an investment is something you buy with the hope it will grow in value and provide some sort of profit in the future.

There are lots of different types of investments - many of which you may have heard of.

Some of the most common include stocks and shares - where you buy part of a company - and property, but they can also include things like gold and even rare paintings.

The age-old question: Is she smiling about a profit or frowning about a loss?

What are the benefits of investing?

Over the long term, investing has proven to generate higher average returns than saving in cash and this is why many people do it.

Cash savings are great for a number of things. You need it for emergencies, such as if your car breaks down or if the fridge gives up, as well as for short-term goals like going on holiday. But they’re not so good for increasing your wealth over the long term.

But why, you ask? Essentially it comes down to two things. Inflation and compounding.

The race against inflation

Inflation is a rise in prices over time - and we’ve all seen how it can take off. Things get more expensive and, as a result, you can’t get as much for your money. It’s all about the buying power, baby!

And, as the returns on cash savings typically fail to keep up with inflation, it means you’re actually losing money over time if you keep it in cash, even if your balance stays the same. Weird, right?

 
Don’t take all your money out of the bank just yet, though. Cash may not be the best thing for growing your money over the long term, but as we mentioned, it’s still an essential part of your financial plan.

Investing usually keeps up with inflation, or exceeds it over the long term. This means your money will grow in line with or faster than the cost of goods and services you may want to buy one day, giving you more spending power in the long run.

However, as investing is a long-term option, you should be willing to tie-up your money for at least three to five years. The longer, the better.

Your investments will rise and fall over time, but this is normal. If you stay calm and ride it out, you’ll find the market tends to bounce back eventually.

The magic of compounding

Compounding is another reason people invest. When your investments make a profit, it means there’s more money invested to earn a bigger profit next time - your profits start making profits!

Think of it like a snowball rolling down a hill. It starts off small and gets bigger and bigger as it gathers more snow - this is what compounding does to your money when you invest over a long period of time.
So, now you understand why we invest, it’s time for you to get started!

Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.

Remember, your investments can go up and down and you could end up with less than you started with. Past performance does not guarantee future results. The information provided is financial guidance and should not be considered financial advice.