The word “investing” may prompt negative emotions in some people. Those risk-averse could be put off by the perceived high risks in investing, while others may find it daunting as they believe they must have extensive skills to avoid major financial losses or huge amounts of capital before they can see returns.
But there are in fact many low-risk options and a plethora of investments you can choose from to suit varying risk appetites, time horizons, financial goals, and budgets.
It is also a misconception that there are always necessarily high barriers to entry to all investment types and strategies.
Here are three reasons why you should begin your investment journey and start early.
Life is getting more expensive
By itself, saving is not sufficient to manage inflationary pressures — where a dollar tomorrow is not worth the same as a dollar today.
Inflation is a sustained rise in overall price levels across the broad economy. It weakens our purchasing power and chips away at real savings.
For instance, in 1980, with $10 we could buy four Big Macs priced at $2.50 each, but the same $10 today can get us only one Big Mac priced at $6.
When we apply this effect of inflation to our savings, you will see that inflation often easily outpaces the meagre interest rates earned from bank deposits. Our money simply can’t keep up with inflation if we leave all of it in a bank account.
In Singapore, the compound average annual rate of inflation for overall goods and services from 2010 to 2021 was 1.42%. Meanwhile, the average annual savings deposit rates and 12-month fixed deposit rates offered by Singapore banks between 2011 and 2020 were 0.13% and 0.36% respectively. Those deposit rates were not enough to beat inflation.
That is where investing comes in. Investing your money allows you to grow it in the long run, so that you can preserve or even increase your purchasing power.
You can participate in the power of markets
Adam Smith, widely known as the father of modern economics, posited that our self-interest and competition form the “invisible hand” that guides resources to their most efficient and valued use. This is the foundation of the free market, which drives companies to create value for their shareholders in the form of stock returns.
As an investor in equities, you will be able to share in the profits that companies generate. For example, the S&P 500 index, which represents the top 500 companies in the US, has performed well historically, with an annualised return of 9.49% between January 2003 and February 2022.
By adopting a passive investing approach and buying a fund that tracks the S&P 500, you could also earn returns similar to that of the index. When adjusted for inflation of say, 2.5%, your net annual return on investment will then be around 7%.
If you are intimidated by the price volatility that stocks may bring, there are ways to mitigate that, such as by diversifying into other asset types as well as within the asset class of equities.
Get peace of mind at retirement with long-term investing
The secret to wealth accumulation is not timing the market, but time in the market.
If timing the market were possible, many fund managers would be posting spectacular returns year after year.
Time in the market requires you to have a buy-and-hold mentality and not let your emotions sway you to change your investment strategy every time the market gets rocky. Even investing at the worst timings — right at every market peak, just before it crashes — would yield better returns in the long run than not investing at all.
The longer you stay invested, the more your nest egg will grow via the "magic" of compounding.
When you start investing passively and early with a well-diversified portfolio, you stand to reap the long-term benefits of the market and can enjoy your golden years in retirement.
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Next on the Endowus Fin.Lit Academy
Read the next article in the curriculum: Investing is not gambling
This article is for information purposes only and should not be considered as an offer, solicitation or advice for the purchase or sale of any investment products. It is recommended that you seek financial advice as to the suitability of any investment. Whilst Endow.us Pte. Ltd. (“Endowus”) has tried to provide accurate and timely information, there may be inadvertent delays, omissions, technical or factual inaccuracies or typographical errors.
Any opinion or estimate above is made on a general basis and none of Endowus, nor any of its affiliates, representatives or agents have given any consideration to nor have made any investigation of the objective, financial situation or particular need of any user, reader, any specific person or group of persons. Opinions expressed herein are subject to change without notice.
Investment involves risk. The value of investments and the income from them can go down as well as up, and you may not get the full amount you invested. Past performance is not an indicator nor a guarantee of future performance.
Please note that the above information does not purport to be all-inclusive or to contain all the information that you may need in order to make an informed decision. The information contained herein is not intended, and should not be construed, as legal, tax, regulatory, accounting or financial advice.