The word investing can be both exciting and daunting. A simple way to describe investing is putting your money into something with the hope of getting more money back in the future. So it is important to understand the word hope in the context of investing, as more often than not there are no guarantees, but on the brighter side, there is a possibility of earning more than just your usual savings account.
Deciding between saving and investing is easier when you understand how each one helps you reach your goals. Saving money is good for short-term needs like unexpected expenses or emergencies. Investing is about making your money grow for the future, like saving for retirement or your kids' education. Remember, what's right for someone else might not be right for you. Some investments need more money upfront than saving accounts do, and they need regular attention, while savings are usually simpler.
When choosing between saving and investing, consider your goals. If you aim to cover short-term expenses or emergencies, saving might be best. While cash savings have minimal risk, they may struggle to outpace inflation or offer high returns compared to riskier investments.
If saving is your focus and want to know more, please check out chapter 2 on saving where you can learn more about tools and techniques to save.
Let's dive deeper into why you should invest, the risks associated with short and long-term investing, and explore some of the options you can invest.
Investing will allow you to grow your money over time potentially providing significant returns in the future. It is also a great way to enhance your financial education and learn more about financial markets, and principles of risk and return.
Investing can help you beat inflation. Inflation diminishes the purchasing power of money and historically investments in assets such as stocks and real estate have outpaced inflation. Inflation is when the prices of goods and services increase over time, meaning your money can buy less than it used to. So if you keep your savings in a current account, the value of the money decreases.
Investing can also help you spread your risk across different asset classes such as stocks, bonds, and real estate. Diversification can help reduce the impact of market volatility on your investment.
1. Time - Investing money is a long-term strategy and if you are unable to spare your money for at least 3 to 5 years consider saving your money instead. Longer time horizons generally allow for more aggressive investment strategies and greater potential returns. So the earlier you start the better it is.
2. Risk Tolerance - Being prepared to ride a rough tide, essentially a bad market condition for your investment, and giving enough time to recover is essential. Generally, younger investors with longer time horizons can afford to take on more risk in pursuit of higher returns.
3. Start Small and Be Patient - There is no minimum amount required to start investing. Starting small allows you to learn without risking significant amounts of money and gradually increase your investment as you gain confidence and experience.
4. Do your research - Give yourself enough time to learn and research different investment options, strategies, and potential risks. Consider seeking advice from financial professionals if needed. Please remember every individual is different in their risk appetite, and financial situation, and a strategy that works for your friend, may not be the right fit for you.
5. Diversify - As the saying goes, never put all your eggs in one basket. Spread investments across different asset classes to reduce risk. Avoid putting all your money into one investment, as diversification can help protect against losses in any single investment.
By carefully considering these factors and taking a disciplined approach to investing, as university students you potentially build wealth, achieve your financial goals, and lay the groundwork for a secure financial future.
| Aspect | Short-Term Investing | Long-Term Investing |
|---|---|---|
| Time Horizon | Typically less than 3 years | Typically more than 5 years |
| Volatility | Higher volatility due to short-term market fluctuations | Lower volatility as long-term trends tend to smooth out fluctuations |
| Risk of Loss | Higher risk of loss due to less time to recover from market downturns | Lower risk of loss as investments have more time to recover |
| Return Potential | Generally lower potential returns due to shorter time frame | Generally higher potential returns due to longer time horizon |
| Inflation Impact | More susceptible to inflation eroding purchasing power | Better able to outpace inflation and preserve purchasing power |
| Liquidity | Typically higher liquidity, easier to access funds | Lower liquidity, investments may be less easily converted to cash |
| Investment Strategy | Often focused on preserving capital and generating income | More opportunity for growth-oriented strategies |
Below are some of the most popular options; this is not exhaustive:
| Investment Option | Description | Risk Level | Potential Return | Liquidity | Suitability |
|---|---|---|---|---|---|
| Stocks and Shares ISA | Tax-efficient investment account for stocks and funds. | Medium | Moderate to High | Moderate | Long-term investing, tax efficiency |
| Index Funds/ETFs | Investment funds tracking market indexes. | Medium | Moderate to High | Moderate | Diversification, low fees, long-term investing |
| Cryptocurrency | Digital currencies like Bitcoin or Ethereum. | Very High | Very High | Low to Moderate | Speculative, very high risk tolerance |
The magic of compounding is like a superpower for your money! It's all about earning returns not just on your initial investment, but also on the returns you've already earned. Picture it like a snowball rolling down a hill, gathering more snow as it goes—it starts small, but over time, it gets bigger and bigger at a faster rate. You would be amazed to see how tiny bits of consistent investment can grow and become an astounding number.
Let's understand with some numbers:
If you had £500 to invest as an initial amount and wanted to contribute £50 every month for the next 20 years, below would be your amount invested and the amount you would have based on average market returns
Please use the link here, to play around with different numbers, years, and rates of return. Time and patience can be a powerful tool investing and this calculator will help you understand this a bit more.
a) Trading 212 - Trading 212 is a commission-free trading platform available in the UK and Europe. Users can trade fractional shares, meaning they can invest in stocks with as little as £1. It also offers a practice account, so a great way to practice and learn.
b) Hargreaves Lansdown - Offers a platform for investing in a wide range of stocks, funds, and other investment products.
a) Vanguard Investor: Offers a range of low-cost index funds and ETFs, allowing investors to build a diversified portfolio based on market indexes.
b) iShares by BlackRock: Provides a wide selection of ETFs tracking various market indexes, offering exposure to different asset classes and regions.
a) Coinbase: One of the most popular cryptocurrency exchanges, offering a user-friendly platform for buying, selling, and storing a variety of cryptocurrencies.
b) Binance: Provides a wide range of cryptocurrencies for trading, along with advanced trading features for experienced investors.
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