Why is patience important when investing
Why investing is important
- Investing allows you to keep your money with you Capital Gains, Dividends, and Compound Interest to multiply.
- Unlike saving, investing can help keep your money from going through the Effects of inflation loses value.
- The general long-term surge in markets along with new, free and simplified options has that Investing more accessible made for everyone.
Whether you have short-, medium-, or long-term goals for your money, investing can help you build wealth. For example, you can use it to secure your pension, fulfill a dream or use it to finance your children's education. We explain how it works.
Let your money work for you
By investing your money, you are making the decision to grow your wealth. Over time, you can generate returns in two ways: Capital gains and Dividends.
Capital gains are the added value of your investment. It's the difference between the price at which you bought an asset, such as a stock, and the price at which you sell it (assuming it has increased in value).
Let's look at an example. It's 2016 and you decide to buy a share of LVMH, which at this point costs € 153. In 2021 it is now worth around € 543. If you choose to sell the stock, the capital gain will be $ 390. Now imagine how much you would make if you bought 20 stocks.
However, you should keep in mind that stocks can also go down in value. Therefore, you should always do your own research before investing and employ strategies to reduce risk, such as diversifying your portfolio.
When a company is profitable, it may choose to share those profits with shareholders. This is known as the dividend. The company decides the amount of the dividend and how it is paid out, which means that you don't always know how much you will get when (or at all).
Some companies are known for their generous dividend policies. Even despite the chaos of 2021, companies like Sanofi and Vivendi have decided to hold or increase their dividend payouts. Learn more about dividends in this article.
Discover the power of compound interest
When you invest long-term, your patience is rewarded with a phenomenon called “compound interest” or “interest on interest”. Albert Einstein called it "the most powerful force in the universe".
Let's say you invest € 1,000 in a fund that has a 5% return in the first year. Now you have € 1,050. You choose to leave the money in the fund. The next year the fund will drop another 5% and so on. After 30 years you will have € 70,760 thanks to the accumulated interest. Interesting, isn't it?
Compound interest is not a get-rich-quick system. It is based on your ability to be patient over the long term. However, the earlier you start, the more interest you will earn and the less you will have to invest to start with.
Again, you need to be aware that every market has fluctuations in interest rates and returns. Your returns can go up and down.
Invest to fight inflation
As we just explained, investing gives you the opportunity to generate long-term returns. And by growing your wealth in this way, you can keep up with rising prices for goods and services called inflation.
When everyday prices "inflate" it means that the purchasing power of your money is falling. The low interest rate on your savings account can't make up for this, so investing is one way to fight inflation.
Why invest money instead of saving?
First of all, saving and investing are two different things. Ultimately, it's about finding a balance. For example, it is important to have a Nest egg from savings build up just in case. The good thing about saving is that the risk of losing your money is very low. On the other hand, with historically low interest rates, your money will no longer grow.
This is why Investing regularly over the long term is an effective way to build wealth. Of course, future returns are not guaranteed and the risk of losing money is real.
However, the graph * below shows the potential of investing money regularly and sticking to a monthly schedule.
Use the opportunities of rising markets
We've seen some crazy headlines over the past couple of years. "That was the fastest stock market decline ever," followed by, a few months later, "stocks soar to new record highs". If you follow the headlines, the stock market looks like a very volatile place.
But if you zoom out, history shows that the The stock market has grown steadily over the past 30-40 years. For example, the US S&P 500 Index has returned around 7.5% every year since 1990. So while the risks are real, the long-term opportunities are impressive.
Invest without barriers
Before the digital age, investing was much more difficult. There were many middlemen, high fees, and the markets were only open to a small group of people. Even getting access to business news was a hassle.
Today, neo brokers like BUX offer platforms that simplify the investment process and eliminate brokerage fees and other commissions that eat up your profits. In fact, the fees associated with traditional investing can hurt investors on a smaller budget, as their costs can end up being higher than the profits.
Now you can invest with almost any amount. It's just about knowing what you're doing and deciding how much risk to take.
Invest in what is important to you
When you invest in a company, you show your support for its goals and projects. For example, you can choose to invest in companies that share your values or make products that mean something to you. This can be innovative, visionary companies, or just an area that interests you, such as travel (TUI, TripAdvisor), luxury (LVMH, Kering), groceries (Beyond Meat, Danone) or cars (Renault, Volkswagen).
In this case, investing isn't just a way to make your money grow. There is real motivation to invest in a company that you believe in. Because all industries are represented in the markets.
So, are you convinced to get started? In the next step, we would like to help you build a portfolio.
Graphics * Info:The blue line on this graph shows the results you would have received if you had deposited a lump sum of € 10,000 in a savings account in early 2003, followed by € 200 in deposits each subsequent month through November 2020, assuming the bank would applies the average overnight interest rate. At the end of the period, the account balance would have been € 54,747 for a total investment of € 52,800. So the total return would have been € 1,947.
The red line shows the results you would have achieved if you had invested the same amount on the same schedule in a fund that tracks the MSCI World Index, a diversified equity index that tracks more than 1,500 stocks from 23 developed countries. Assuming the fund had reinvested the net dividends, the balance at the end of the period would have been € 144,223 for a total equal investment of € 52,800. So the total return would have been € 91,423.
The chart also shows the difference in volatility between the two options. The returns on the stock index were much more volatile than those on the savings account. The calculation does not include any fees, costs or taxes. Past performance is not an indicator of future results.
All views, opinions, and analysis in this article should not be read as personal investment advice and individual investors should make their own decisions or seek independent advice. This article was not written in accordance with legal requirements to promote investment research independence and is considered a marketing communication.
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