Chapter 1:
Investing in Your Future
What Is Investing & Why Should We Do It?
Investing simply means putting money into a range of different assets with
the view to increasing its value rather than just leaving your cash to sit in a
bank account. There are lots of things you can invest in such as property,
art, collectables, commodities, premium bonds and, of course, stocks and
shares.
In the past, if you were to leave your money in a savings account, you
would get a good rate of interest, but nowadays savings rates are very low.
In fact, inflation is higher than the rate of interest, so money could actually
lose its value in the bank. The argument in favour of investing is that, in
theory, you should get a higher rate of return then had you just left any
surplus money you had in an ordinary savings account.
Considerations
In reality, any type of investment has a risk attached to it, and therefore you
need to think very carefully before you part with your hard-earned cash.
The focus of this book is, of course, investing in the stock market, and there
are several things you need to consider before spending any money. Ask
yourself the following questions and answer them honestly…
Can you Afford To Invest Your Money Over A Long Period Of Time?
You should only invest money you don’t need in the foreseeable future. If
you know you are going to need your money back in less than five years,
then don’t invest it. This is because stock markets go up and down so much
that investing over a longer period means that if the market does dip, you
will be able to ride it out and regain any money lost. Five years is the
minimum but really the longer, the better. Some Financial Advisors will
recommend ten years as a minimum period.
Of course, five to ten years is a long time no matter what stage of life you
are at so it is also recommended that you have some sort of savings that is
separate to your investment account. Financial advisors tend to suggest that
this should be the equivalent to at least three months of your salary. This
way if an emergency did arise, you aren’t tempted to start selling stocks and
shares prematurely as you could end up making a loss.
If your answer to this question was ‘I don’t want to put my surplus cash into
something I can’t access for a long period’ then you may be better to pay
more into your company pension if you have one; this is usually a type of
investment, often stocks and shares, but is managed by someone else and so
often feels safer.
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