Why You Should Be Investing

by Adam on April 12, 2010

Saving money in a ISA is great at helping you counter-act inflation as you to keep more of your interest, but Cash ISAs are not going to help you grow your pennies over the long term. For that you need to be investing.

no time like the presentYou may be in your 20s and money’s tight, or in your 30s and 40s and have lots of financial commitments. Regardless of your situation, you should be investing (and not just the minimum in a company pension scheme if you’re lucky enough to have one).

If you’re not already investing and don’t start soon you could miss out of tens if not hundreds of thousands of pounds over the course of a lifetime.

If you’re reading this in your 20s I’m especially excited you’re here reading this because time is on your side.

Investing is daunting

Unfortunately, unlike in America where it appears stock market investing is ‘sexy’ and cool’, us Brits are traditionally a bit more reserved about investing in stocks and shares.

Talking with my friends about the subject most think investing is something that only rich people do;  that it’s complicated and risky; or it’s something they’ll get around to but it’s too hard right now.

There’re wrong though.

They should be investing something now, even when other financial priorities seem more pressing. Even if it’s a deliberate decision that may be right for them, I doubt they fully appreciate the true cost of  their priorities. I undertand their reservations though so let me elaborate with 4 reasons why you should be making steps to grow your pennies and begin investing.

1. Long Term Return

When you buy shares you are buying tiny pieces of companies: Companies sell part of their organisation as shares to investors to gain more funds to grow and develop. Investors buy these shares with the hope that the business is profitable and pays out company profits back to them. These payments to shareholders are known as dividends. As well as the dividend money, investors also hope the shares they have bought go up in value as demand for company shares grows, assuming the company is profitable and has strong future potential.

Of course there are good and bad companies but collectively over the long term history has shows that the returns (increase in value over the course of a set time period) from businesses have consistently outperformed most other asset classes (an investment term for types of things you can invest your hard-earned pennies in: i.e gold, cash, shares, or even commodities like sugar). The difference in returns between shares and say, a Cash ISA, may seem small over the course of a year but longer term the difference becomes thousands of pounds.

Why Investing is Important

Whilst the rate of return is not important when it comes to cash savings (click here for the article) the return of an long term investment is important as it determines when you can retire or reach any other goal that requires plenty of pennies. Ultimately it is  investing in shares that gives you one of the best chances to enjoy the best return over the long term. And arguably the long term investment return is more important than in the past as people are living longer than ever:

Will you be able to afford 20-30 years of not working when you retire?

Even if you saved double the amount in a Cash ISA compared with someone who invested their savings in shares, you are unlikely to end up with anywhere near the amount you are likely to achieve by investing in stocks and shares. There’s only so much you can save so investment returns have the potential to help considerably.

cautionImportant Note: Investing in shares is more ‘risky’ than cash because the value may fluctuate over time but with the right strategies and investing philosophy it doesn’t have to feel or be anything like gambling with your future. This is an article in itself and will be addressed in another post.

2. Time on your side

It’s not only about the asset class but the time you give your pennies to grow. The difference between investing now and investing later is huge. Ramit Sethi gives a good example in his book: I Will Teach You to be Rich: No Guilt, No Excuses – Just a 6-week Programme That Works (which, as my favourite personal finance book you should buy by the way),  when he tells the story of  Smart Sally and Dumb Dan:

“Smart Sally starts saving at 25, by putting money into a low- cost investment account. She decides to do that until she’s 35, then she stops. So she invests for 10 years. Dumb Dan doesn’t get around to it until he’s 35. He invests for 30 years, until he’s 65. And when they both retire, because of compound interest … (Smart Sally) has about £100,000 more.”

In this story Sally saves less and ends up with more simply because she started earlier. This is possible because the interest she earned early on began earning interest too. Magical pennies indeed!

3. Information Super-Highway

The internet’s great isn’t it?! Getting started in investing has never been easier than today. The preconception that investing is only for the rich may have been true a few years ago but now the barriers to investing are much lower than at any other time and anyone with an internet connection has a chance to learn. My parents would have had to visit a broker with a large cheque if they had wanted to do what I’m doing when they were my age. Instead, you can now automate small amounts directly into investments around the world with a few clicks of a mouse if you know what you’re doing.

That said, in my journey to learn about investing I found lots of mis-information and confusing things on the internet but that’s fixed now because Magical Penny is here!

In all seriousness there are some great resources online that I’ll be reviewing in up-coming posts. In the mean time, do some internet searches yourself and let me know in the comments if you come across any great finds.

4. Thinking Beyond Today

Finally, the best reason to invest is that it encourages you to think beyond today. It’s too easy to only be concerned with what’s right in front of you in life, rather than having goals on the horizon. By saving long-term you really do get a sense of empowerment that you are taking control and can reach some ambitious goals.

Magical Penny is only just beginning to talk about investing but is there anything you’d like to know or have questions about that you want answering right away? Leave me a message in the comments 🙂

{ 10 comments… read them below or add one }

Sean

Question from me really. You say shares outperform all other investment types long term. What I’m keen to know is this: how does the performance of shares as an investment compare with the performance of property, say over the last 25 years?

Rightly Knightly

I’m actually getting excited. Following the path of least resistence and picking up the breadcrumbs towards investment that you and your years of investigations have left behind.

I like your british mentality, that’s exactly where I am. Too much complication and risk in investments so it has always been in the ‘best left untouched’ category in my mind, but i’d like to change that.

@Sean – until recently surely Shares in house building companies would have outstripped the housing market? Can it be a matter of where and which industry you buy your shares?

Jon

Amen in the British mentality. Not without reason too; I know several older people with share-linked annuity pensions who are not that fond of the stock market right now. I’d also echo Sean in hazarding a guess that property delivers comparable or better returns, plus a potential income stream and relatively more control; it is also a quintissentially more British type of investment and one I strive towards more. However, I am interested in your investment series as I like the control it may be possible to take by investing young and soaking up some of the good years without having my whole retirement staked on the market.

Adam

I love this debate guys. To get straight to the point I am much more in favour of stock market investing than property but I want to do the subject justice with an epic blog post (or series) rather than comment here. There’s so much I want to counter about your comments but I’ll save it for another time. Suffice to say, I’m honoured you’re reading and you’re giving me a chance to provide you with my perspective and share my research.

Sean

Did some back of a beermat figures. Rise in the ftse 100 since 1984 is approx 577%. Rise in nominal house prices over same period is approx 505%. Genuinely surprised, thought house prices would take it by quite some way. I suppose that the advantage is that you can’t live in a share portfolio. But as pure investment, not much in it at all.

The Other Adam

For me personally, I am far more on the property side than the stocks and shares side, for a few reasons. Firstly, I find looking around, buying, doing up and then renting/selling properties a much more interesting and exciting project than trying to understand how stocks and shares work and looking at numbers all day. I look at numbers all day while I am at work, why would I want to take that home?

Second, surely even if the value of the house isn’t rising as quickly as the value of shares, you can rent out a house, meaning a better monthly income than the shares offer? Maybe I’m talking out of my backside there, but it makes sense to me.

Finally, and this is perhaps a silly one, I understand how buying and selling properties works, whereas my ‘fragile little mind’ can’t quite cope with how stocks and shares work, where to invest, how much to invest etc etc. If someone could explain it to me in simple terms (imagine talking to a retarded chicken), then I may gain a better understanding of it. I am looking forward to you going into more detail Adam, to see if the fog clears a bit!

Of course, I could try and do both, and invest any profit from renting a property into stocks and shares! Surely the best policy if you had shed loads of cash would be to invest in both? Not put all your eggs in one basket and all that. But again, I am talking from a total ignorance point of view here.

Rightly Knightly

Following on from the other Adam my intention is to have a diverse portfolio for my retirement. Property, small cash savings, work pension, private pension & stocks and shares. It’s all possible but at this moment in time I don’t know which way i’d like to split the funds (i.e. a 20% split of my money across all five will probably be stupid).

Kate

I love watching my balance grow! Sometimes it is difficult because I realise how much money I would have if I didn’t save, but it is going to benefit me in the long run.

Jon

As I mentioned earlier, 577% is worth much less if you need to withdraw in a dip! Sane applies to property too, but I feel I would have to be much more observant of share investments.

Georgie

I’ve recently started into a tax free savings account and I cant explain how good it feels to see my balance grow each month! I think when I’ve got a few months of living expenses covered I’ll maybe start putting some into a share index as well.

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