Investment 101

+Every successful investor starts by learning the basics

A few people may stumble into good fortune - inheritance, a business takes off, etc - but for most of us, the main way to achieve financial security is to save and then invest the savings over time. Even when starting with modest means, we all can begin the journey to financial security and all that it promises: buying a home, educational opportunities for children, and later on a comfortable retirement.

+Investing is not betting

When you invest, keep in mind that you are taking on some risk. However, there is a difference between investing and betting. Betting is putting money toward an outcome that is largely determined by luck and hoping to get a big payoff in a short period of time. Investing is committing money over the long term to gain a reasonable financial return. A wise investor does research and makes decisions where the risk is likely to be outweighed by the return – and does not simply rely on luck.

+Don’t underestimate the power of compound interest

Compound interest (interest earned on interest) can help your earnings to increase significantly, especially when the return is high. Put differently: the sooner you invest, the more you earn.

Let’s take an example: If you started investing £200 per month which earns an average of 5% a year (compounded semi-annually), in 30 years you would have £165,561 - £72,000 from your direct contributions and £93,561 in interest earned.

If you delayed saving for five years, you would have £118,681 - £60k in contributions and £58,681 in interest earned. That’s a difference of almost £50,000!

+Make sure your risks match your return needs

Successful investing requires both a true understanding of your ability to tolerate the risk of an investment and the ability to choose risk and return-appropriate investment options based on your personal goals.

Some people fall into the trap of playing it too safe, parking all of their savings in a cash savings account. Savings accounts and others are a great choice for an emergency fund and short-term goals, but not for the long run. Why? Because the return they provide is very low, usually less than the rate of inflation (the general rise in the cost of goods and services over time). Basically, your cash savings will be worth less over time.

With other investment instruments (for example, corporate stocks and bonds) the risk of losing some or all of your money is higher than cash in the bank, but generally, so is your return.

What's important is understanding how much risk you need to take on to get the financial returns to meet your personal goals, as well as identifying the true risks of your investments.

+Diversify to increase your potential returns

You've heard the old adage, “Don’t put all your eggs in one basket”.

We have heard many women say that they don’t understand financial markets enough or have seen enough news headlines reporting wild swings in the stock markets, and therefore choose to hold their money in their savings account or buy tangible items such as property or jewellery. While that may seem safe, in fact, it’s quite a lot of eggs in too few baskets.

So is there a way to minimize these risks? Returns are never without risks. The value of an investment (whether it's a stock, a house, or even fine jewellery) can go down as well as up. Even the money in your savings account can be lost in the event of a bank run. There will be market fluctuations, which means the money may not be there when you need it.

Research shows you can best mitigate this risk by diversifying your investments into short/medium/long term to allow yourself the cushion of riding out these fluctuations while still having access to some of your money. Holding a portfolio of diversified stocks, bonds, real estate, cash, and even fine jewellery leads to better overall returns from your investments than if you held just a few of the same assets.

So better prepare for market fluctuations and don't put all your money into the same type of investments.

+Beware of hidden transaction costs

In addition to inflation, you also have transaction costs dragging down the return from your investments. Make sure you know what your total costs are and in general keep it simple (ie low and simple to track). As you get more sophisticated, you can explore higher fee investments (such as hedge funds & private equity).

It is perfectly reasonable to pay for expert advice and management. Just make sure you know what you are getting yourself into. Read the fine print. And don't be afraid to ask if there's something you don't understand. Afterall, you're the client!

+Watch out for scammers

If someone offers you an investment that seems too good to be true, it most likely is. Don’t be afraid to ask questions, and if you don’t understand something, don’t buy it. Scammers will often headspin you with jargon to intimidate and confuse you. Real opportunities should be laid out in straightforward terms.

There is no guarantee that you will make money from investments you make. But if you get the facts about saving and investing and follow through with a strategy, you have a better shot at building your personal financial security and enjoying the benefits of managing your money well. Make your money work for you!

+Only two things are certain...

While we’ve been talking about uncertainty in investments, the two things you can count on (as the saying goes) are death and taxes. The timing of your investments could seriously affect the amount of money you give away in taxes. By understanding the tax implications of when and how you make your investments, you can maximize the amount of money you keep in your own pocket.

There are also tax implications on the passing of an inheritance. It’s explored more in the Planning section, but long story short - write up a will!

By taking some time to take stock of what you accomplished and where you hope to be in the future (as outlined in "Planning 101"), you will be well on your way to building a nice basket of investments that will likely reap rich rewards in the future.