You clicked on this article, which probably means that you haven’t started investing yet or just started looking into it. I can totally understand that. Maybe you think that it is too risky, takes too much time or that you don’t have enough money to invest.
Actually, those are some common misconceptions about investing. It really depends on the investing strategy. But still, I am not a financial advisor. So please do your own research and inform yourself.
There is a chinese proverb that says: „The best time to start is 20 years ago. The second best time is now“. So let’s get right into my top 5 reasons why you should start investing right now.
Reason Nr. 1: Let your money work for you
Have you ever wondered why “the rich are always getting richer”? One reason is that they use money to make more money, instead of working directly for money. That’s basically what investing and all the hype about passive income is about.
“Why would you work for [money], if they can print it?”Robert Kyosaki
Let me give you an example: imagine you work for one whole month and from that income you save $100. This is money you set to the side and that you don’t need to pay your expenses. Great! Now you have $100 more in your savings account. But really that money is just sitting there, doing you no good (but your bank is using it to make more money for itself). What you could do instead is invest it and buy shares of some company at the price of $100. Now you own a part of that company. This company makes profits, which it usually uses to pay investors back through dividends and to grow its business. This in turn increases the value and eventually the share price of your company. But even if we ignore the share price gains, you basically have a coupon now that gives you back 5% of your investment every year. So after one year you receive $5 in dividends.
Reason Nr. 2: Insurance against inflation
Now you may be wondering: „Doesn’t investing mean taking more risk?“. The answer is yes and no. Over time with those $100 that you have saved you can buy less and less stuff, which is called inflation. There are many reasons for this, like a weakening economy or the federal bank printing money. If there is more money available but the value of everything that can be bought remains roughly the same, then your money will be worth less.
By the way, inflation means that your wealth is decreasing exponentially. Currently the inflation rate is at about 2%, so it would take 35 years until your savings are only worth half as much as today (calculation: 1,02 ^ (-35) = 50%).
In the extreme case of a currency devaluation, your $100 could also become actually worthless. Just think about what money really is: the only reason it has any value is because people treat it like it does. Now compare that to owning part of a company. This company does not decrease in value just because some currency becomes worth less (or worthless). A company has real assets, which produce real value. The same thing is true for real estate as well, but I will focus on investing in the stock market for now.
“Cash is Trash”Ray Dalio
Reason Nr. 2b: No attractive alternatives
Until recently, bank accounts (or treasury bills) also paid a small interest on your savings with practically no risk. This makes sense, because the bank uses your money to invest it in something with an even higher interest rate. But really this interest was never that good to begin with and has been decreasing to the point where it can’t even keep up with inflation. Sometimes you even have to pay for your bank account, which I find just ridiculous.
Reason Nr. 3: Passive income
Depending on your strategy, you can generate a source of passive income by investing. This is money you don’t have to actively work for, which is another kind of insurance. If you had enough money to invest, you could theoretically even earn enough so that you would not need to work at all. You could just live on the dividends that you receive from your investments without ever actually touching the money you initially invested. That is the idea behind being completely financially independent.
Of course, if you could also just invest this passive income again, which leads me to my reason Nr. 4: compound interest.
Reason Nr. 4: Compound interest
Saving means growing your wealth linearly. Investing means exponential growth, because you can reinvest your profits to make even more profits. So while 5% on your investment per year might not seem like much, this will actually double your investment in less than 15 years. And the thing about exponential growth is that it pays to start early (Warren Buffett actually started investing when he was 11 years old). To be fair, if you really want to increase your wealth at the rate that Warren Buffett did it, a 5% return per year is not going to be enough. But exponential growth always beats linear growth eventually, even with relatively low interest rates. You can calculate how much your investment would be worth after X years with the following formula:
Initial amount invested * (1 + annual return in %) ^ X
Reason Nr. 4b: Retirement
In extension of the last reason, just saving means that you can’t spend as much in neither the short-term nor the long-term and that you probably won’t have as much savings for retirement. Having a passive income might also be a nice bonus in retirement.
Reason Nr. 5: Experience
Another good reason to start investing early is the experience you gain and to get in the habit of investing regularly. We learn through our mistakes. At the beginning, you cannot lose that much money compared with later. Even if you haven’t saved that much money yet, there are ways to start investing, like buying shares with low prices, fractional shares or fonds. You can find more information about investing small amounts of money in this article (coming soon). Also, you can slowly get used to investing with increasing amounts.
Now I have explained why I think it makes sense to start investing now, but as I said at the beginning I understand why you still might be skeptical. After all, I had those same worries before I started investing.
Mainly: the risk involved.
I won’t lie to you: investing always involves more or less risk. But there are some investments which have very low risk, like large companies with a strong balance sheet and future outlook, REITs, or bonds (if you don’t know what all of that means, don’t worry – I this article just for you). You can also minimize your risk through research and diversification.
In the very long-term view (25 years), the economy has always been growing exponentially. So even after the Wall Street Crash of 1929, the economy and the stock market recovered in 25 years. On the other hand, investing in 1975 and selling in January 2000 at the peak of the Dot-com bubble would have given you an annual compound return of over 13 % – that means the stock market increased more than 21-fold in that time!
The average annual compound return in the stock market over 25 years is 7,07 %.Calculated from YahooFinance data
The second reason you might not want to invest is time.
And you are right: depending on how you invest, it takes time to do the research before investing. But for me personally, the benefits I outlined in this article are definitely worth it. Besides, there are ways to invest with relatively low risk and good returns that take almost no time, like buying an ETF.
I enjoy the research. Investing is like a hobby for me, so I don’t really mind that I invest my time in it. Through all this research, I am always informed about current developments. Since I started investing, I have learned so much about the global economy, specific companies, general trends and innovations.
I will keep on learning and try to convert my insights into these neatly packaged blog posts. I hope you enjoy them!