Investing Takes a Bit of Courage…
What’s The Point in Investing?
You might think this is an obvious question but it’s worth asking! Why bother to invest in the first place? After all, you could just leave your money in the bank and not have to worry about global crises.
Of course, people invest to make money. The reasons for wanting to make money are countless but everyone will want to end up with more than they started with. Fair enough?
That’s a good point, very well made Marco, BUT, if you consider the way cash has grown over the years compared to being invested in a well-balanced portfolio, the results are pretty stark:
The green line is the investment I mentioned, the red line is inflation and the blue line is what you’d get if you left the money in the bank earning 1%pa.
Costs of Investing
I think the chart speaks for itself but before I pat smug little self on the back, we need to be mindful that when you invest, you’re paying 2 costs that you wouldn’t have to pay if you left your money in the bank.
This 1st cost is pounds and pence. To invest, you pay investment companies to manage your money. You also pay the company that holds your money (investment platform, pension provider, bond company) and, finally, there’s lovely Marco’s fee to make sure everything works OK and to keep an eye on things for you. These are all costs you wouldn’t have to pay if you left your money in cash.
The 2nd cost is risk. You’ll notice from the green line in the chart that there are going to be times where your values fall. Of course, that’s what’s happening now. Whilst the longer-term trend is good, there are times when you’ll feel concerned, depending on what’s happening in the world. You should view this as a ‘cost’ because you wouldn’t bear it if your money was in cash.
So, for your investing experience to be a good one, you need to end up with more money than you started with AFTER you’ve paid the monetary costs and after you’ve factored in the emotional cost of seeing your money go up and down. History tells us both costs are well worth paying but I think it’s useful to put it in these terms for you. that’s how I look at it anyway.
Cash is High Risk!
You might think it strange for me to suggest cash is high risk. After all, it’s money that isn’t going anywhere and it’s probably with a reputable bank (if such a thing exists!) so where’s the risk?
Going back to the graph, you’ll see that, over the long-term, inflation (red line) has grown more than your money in the bank (blue line) which means you’re guaranteeing a loss, over time, in terms of the spending power of your cash.
To enter into a strategy with your money where you’re almost certainly going to lose, over time, would seem a little foolish in my opinion.
Certainly, we all need cash to cover day-to-day expenses, immediate income needs and emergencies but having much more than this isn’t necessarily a sensible thing to do.
Not Much of a Choice!
So, you’re faced with the choice of leaving your money in cash and seeing it potentially fall in value compared to inflation or investing it and incurring financial and emotional cost.
Over the long term, it’s plain to see that investing is the better option but you need to go into it with your eyes open and accept that taking some risk with your money won’t always be plain sailing.
The Value of Advice?
By now, hopefully, you know I don’t use these blogs to ‘sell’. I think that’s a bit cheap and doesn’t really add much in the way of value to you.
That said, if I may be so bold, where I earn my money is by ensuring you take a level of risk you’re likely to be comfortable with and, at the same time, holding your hand through the process.
Investing can be very emotional and having somebody in your corner who understands how things work and who’s seen it all before can be extremely valuable.
I don’t want to blow my own trumpet but, for those of you who’ve had relationships with me for some time, I’d hope you’d understand what I mean.
Final Thoughts
I’ll leave you with the chart I included in my last blog which I think is pretty powerful
Since the credit crunch in 2008 / 2009, apart from a few blips, we’ve seen really strong growth in investments. This doesn’t always happen, though. Investments don’t go up in a straight line.
Investing takes some courage, especially when, at the moment, our friend Vladimir does something unexpected. We need to understand that this is part of the investing landscape. The world can be scary!
I hope this has been useful and gives you some reassurance but I’m here if you need me…