Independent, young and with the first stable savings in your bank account? This description is one of the most repeated among those becoming interested in the financial world and starting to invest money when they are young.
They are, above all, millennials who began their working lives a few years ago and had enough independence and essential knowledge to know that if they don’t put their money to work, inflation will eat it up. There are other profiles, of course, but they are fewer.
Although most people base themselves on a limited estate, such as their first income, they also have a great advantage. And is that, due to their age, the ability to save they may have in the long term, however small, is much higher than that of other older investors.
The problem is that if they do not have enough knowledge, an adequate strategy or the help of a financial advisor to guide them to make their money profitable, they can end up without taking any advantage of it.
For this reason, many think that with small amounts, they can do practically nothing. However, suppose we focus on saving and commit to contributing certain sums periodically. In that case, we will have access to a wide range of possibilities in the financial markets depending on our purpose.
Let’s see where to start investing these small amounts of money.
Understand Risks Involved in Investments
Firstly, you must know about what is referred to by investment risks. It is the change or volatility in the value of the investment, which can be upward or downward. The riskier an investment is, the more likely its value will decrease or increase.
Therefore, from an investor’s point of view, a lack of certainty about future returns on your investment is a financial risk. With this method, there is the probability that an event with negative economic consequences will occur, where either there is no return at all or the benefits obtained are lower than expected.
There are different ways to classify an investment’s risks. One of the most common is the level of risk or exposure that a financial investment represents, whether it is a high, medium or low-risk operation.
- Low risk
It has little probability of representing non-payment or losses. Some investments of this type can be with banks or the government since these institutions have a low chance of failure compared to other issuers such as a company or person. It would help if you were wary that these investments are low risk and generate lower profits.
- Medium risk
A medium level of risk offers considerable returns and implies a more significant commitment to the investment operation because of the willingness to expose more invested capital. Some assets of this type are real estate bonds or debt.
- High risk
A high-level risk exposure provides higher returns in exchange for assuming higher volatility. This risk means that the risk of bankruptcy or default is more delayed, but returns tend to fluctuate more. When choosing this investment type, it is advisable to have a better temperament and knowledge, have a loss containment strategy, and be very active when investing. At this level are stocks, currencies, or derivatives.
Choosing the Right Investment Options
Once you are ready to invest, the next step is choosing how to do it. Now more than ever, there are many more ways to invest, and you can get as little or as much involved in the process as you want.
If you are thinking of making your savings profitable in the long term, it is best to invest as early as possible since the market’s volatility in the short term will have a relative impact on your money.
If you are starting, the most advisable thing is to invest a certain amount of money and make small periodic contributions that ensure we have sure future profitability and weather inflation. In addition, you can always increase these amounts in certain products over time.
Suppose we are going to start investing 1,000 pounds. If we manage to save money, like 300 pounds constantly for ten years, we will have, during the first twelve months, 4,600 pounds, and in 2030 we will have built a saving of 37,000 pounds. With this starting point, we face two options:
- Leave the money in a bank account that gives us 0% interest. We will lose purchasing value if we propose a scenario in which inflation rises by around 2% each year. Consequently, this option leaves us with a total of 30,232 pounds.
- Start investing that money. Inflation would also affect us, but if we carry out the appropriate strategies and obtain an average annual return of between 7% and 8%, we could accumulate a substantial value of about 46,000 pounds (more than 56,000 pounds without discounting inflation). That is, after ten years we would have obtained a profit of around 10,000 pounds.
It is a fundamental part of the wealth of a person and even a company.
Life is a constant change, and sometimes it brings unpleasant unforeseen events. These circumstances are unavoidable.
Products such as insurance help us protect ourselves against specific incidents of this nature. But, it is not economically viable to cover all our contingencies through this route.
Nor is it an excellent option to resort to debt every time we have to solve a problem that involves a disbursement of money. In the end, we can lose control and end up in debt.
The best solution is to make an emergency fund or reserve fund.
An emergency fund is nothing more than money saved to face unforeseen events that may arise
To take advantage of the interest generated in a certain period from investing an amount of money in a financial institution is known as a term deposit. The bank returns the invested amount, plus the interest on this term deposit when this term is over
One of the advantages of this category of financial instrument is that the profitability for this deposit is known, safe, and fixed at the time of making the investment decision. However, the earnings are usually low, with a maximum profit of 3% and income amounts that can reach $ 200,000.
But, term deposits are also subject to reinvestment risk. Reinvestment risk occurs when the investment horizon of your project is longer than the maturity of the term deposit, so there is no certainty about the rate at which you can reinvest capital or when it is time to renew the instrument.
Equity funds invest more than 75% of their assets in equity assets in search of good returns.
These funds are an ideal option for investors looking to increase their capital and obtain a good return on their money in the medium-long term (3 to 5 years).
The high volatility of the assets they invest in can lead to losses within the investment portfolio. In exchange for higher risk, these funds can offer returns much higher than other more conservative funds.
If you are willing to take a greater risk on your investments, the best way to obtain a higher return is through equities. Investing directly in stocks tends to give a much higher return than any other asset. However, this market tends to experience greater volatility, so it will be necessary to diversify and remain calm in the event of sharp drops. Experts recommend that if you are not used to investing in the stock market, do not invest all your money simultaneously and in a single asset. Do it with periodic contributions, investing small amounts of money, long term, and diversifying.
One of the most exciting options may be investment funds, which will allow us to access assets and markets that are not always within our reach. These products can be contracted by experienced investors and those just starting, as experts manage them in the field. Investment funds are an excellent way to have different assets from different geographical areas and sectors. Their operation relies on collective investment, i.e., it groups together the capital of many savers and diversifies it. Investing in mutual funds when you are young and making money is possible.
It is one of the most recent formulas in the investment world. You can invest in shares of emerging companies or start-ups not listed on the stock market or in other regulated markets through crowdfunding. This model allows you to support entrepreneurs and grow their businesses. However, although it can bring you great benefits if it goes well, it is also one of the riskiest options since some of the new companies that arise every day end up in bankruptcy.
Currently, there are different platforms through which you can invest in crowdfunding. Some of the best known are Kickstarter, Lánzanos, Crowdcube or Indiegogo, for example.
Select right investment tenure
When deciding between short and long term, the first thing is to know what each one refers to, and here the criteria may vary depending on the investor, manager or financial advisor with whom you speak.
Generally, short-term investments are those with a time horizon close to one year. The medium-term ones are for objectives between two and five years ahead, and the long term for all investments over eight years.
As the name implies, short-term investments are those that we expect to produce a more short-term return. They are the favourites of the majority since the level of risk is understood to be lower.
This type of investment can be both fixed income and variable income. An excellent example of these is time deposits. The deposit is a contract between you and the bank, where a customer gives his money to the bank at fixed rates. Profitability is low, but the user benefits from the security of the financial institution. In this option, the money does not assume as many risks as with long-term investments.
Savings accounts are also another short-term investment option whose security is maximum for the investor. They are demand deposits that you can withdraw at any time, but which in turn offers you a specific interest rate, usually low, but which gives you freedom of movement with your money.
As we have said, long-term investments are those that you will hold for an extended time. When investing long-term, you can afford to be more aggressive because you have a longer and more distant time horizon, so you can choose to invest in a more aggressive mutual fund to get the highest rate of return.
A piece of advice when it comes to investing for the long term: you shouldn’t panic when the value of a stock falls, and you should also avoid selling just because the market is looking dire at any given time.
Keep in mind that the market is cyclical and always recovers from dips, although it may take a while to do so. However, if you withdraw when prices are low, you may lose some of your initially invested money. Hence, it is advisable in these cases to let prices recover over time.
Investing shouldn’t be an option; it should be an obligation.
More people than we think do not even know what inflation is and how it erodes our purchasing power over time.
First of all, document yourself well before investing. After reading, documenting yourself and knowing where the investment shots are going, seek help from professionals if you do not want to do it on your own directly.
With professionals (without belittling anyone), I do not mean that you go to your bank branch all your life and ask for shares or funds to buy. Since there, the bank employees will always advise you on products that the bank wants or “needs” to sell. Find a freelancer with whom you can align your interests.