Welcome to the TBanque Summer School! It is an absolute pleasure to have you here with us for these upcoming classes.
Our first session today is on Why Should you Invest?. A very common question and one we will look to break down and explain for you before we explore further subjects like: Can you afford to invest? When is a good time to start investing? What type of investor are you? What should be your investment goals? Choosing what to invest in, how to pick a stock, the psychology of investing and much more.
First things first, lets discuss the main reason people actually invest. It is to make money. If you are someone who plays sport or plays an instrument, unless you are Cristiano Ronaldo or Beyonce, chances are youre not doing it to make money and are probably playing for enjoyment. But that just simply isnt the case with investing. People invest to make returns, to try and beat inflation and to build wealth over time.
Here at TBanque we have seen a massive rise in recent years of people looking to invest and we feel we have a duty to share as much free educational content as possible.
So lets not waste any time and get stuck in.
A survey from 2020 showed that a third of Brits owned stocks and shares which was a 50% increase from 2018 and a report released earlier this year showed that 80% of Gen-Z are now investing1. However, it is worth noting that this report showed a massive 64% of the 16 to 25-year-olds surveyed have experienced some form of investment loss, which is why here at TBanque we want to give you all the opportunity to learn how to navigate the markets and become a better and more knowledgeable investor.
Using the stock market to beat inflation
So, back to the reason why people invest. You could just leave your money in a bank but the problem with that is, that every year, youre effectively losing money to inflation. Have you noticed things get more expensive each year? Train tickets, gas bills, your food shop or even the price of a Freddo chocolate barwell that is inflation at work. Inflation is just one of the reasons people invest, in an attempt to try and beat it. But does investing actually beat it?
While past performance is no guarantee of future results, stocks have historically provided higher returns than other asset classes. An analysis of holding periods between 1926 and December 31, 2017, found that the annualized return for a portfolio composed exclusively of stocks in the S&P 500 index was 10.22% well above the average inflation rate of 2.89% for the same period2.
It is of course worth noting that you could start investing in a year when the stock market doesnt go up or when inflation is higher than your returns. It is important to have a long-term mindset, and the numbers and statistics do back this up.
As mentioned earlier, the most invested stock market in the world, the S&P 500, averages around a 10% a year return over the last century and has positive yearly returns over 70% of the time. This does not mean you can expect 10% growth every year; you could experience a gain one year and a loss the next. But if you keep your money invested for the long term, the goal is for these gains and losses to average out over time, ideally ending in the black by the end of the investment period.
Now we have some stats to back up the reasons for investing, lets look at what that could look like for us in the future if we were to start today.
Using the average returns of the US stock market, lets say we start by investing $200 or pounds, every month for the next 10 years with a 10% rate of return on average, our investment would be worth $41,851. Now, that number is not to be sniffed at but lets see what happens if we change the time frame from 10 to 30 years.
With the power of compounding, the investment would be worth $459,832. Again, this isnt us saying you will be guaranteed these returns, but if history is anything to go by, this is what it could look like. The math shows the importance of regularly investing and having a long-term investing mindset which is something we will focus on in a later class.
Compound interest
Now lets focus a little bit more on compounding.
Albert Einstein is rumoured to have said that Compound interest is the 8th wonder of the world and Compound interest is the most powerful force in the universe. While were quoting famous people of our time, heres another great one from Benjamin Franklin: Money makes money. And the money that makes money, makes money.
Assume you have ?100,000 today (which of course would be lovely) that you invest and get an average annual return of 5%. In a year, that ?100,000 would earn ?5,000. If all those portfolio gains are reinvested, you could earn ?5,250 in the second year, ?5,512.50 in the third year, ?5,788.13 in the fourth year and so on.
But your investments can only benefit from compound interest when the returns are reinvested. Had you withdrawn all the returns you earned on your ?100,000 investment, you would only be earning ?5,000 each year.
In the short term, the impact of not reinvesting returns may seem insignificant. But wealth building takes time and patience, so if we extrapolate those returns over 30 years, there is a massive difference in wealth between an investor who reinvested their returns and an investor who did not.
When reinvesting returns, your initial ?100,000 investment grows to ?432,194.24 (or 4.32 times what you started with) over 30 years. On the other hand, your investment would only grow to ?250,000 (or 2.5 times what you started with) if you withdrew your returns, which means you lose out on almost ?182,000 by not reinvesting your returns.
Essentially, as our math shows, compound interest can act as an accelerant for your investments. With it, your wealth can potentially grow quicker which can bring you closer to your financial goals, especially if you start early and choose to leave your investments for long enough.
Saving for the future
Another motivation as to why people invest is to save for the future. Whether that be for early retirement, a house or even as something for their children, investing correctly can prove beneficial for them. Now, you might say why dont I just leave my money in the bank?, and if you remember earlier we said because of inflation, but the other thing to mention is that interest rates are historically low right now. Gone are the days when interest rates were above 10% and you could get a return on your savings.
Conclusion
In summary, why should you invest? Well, as we have discussed, people do so for a number of reasons but first and foremost it is about making money. With interest rates low, investing for the long term can prove to be a beneficial decision when done correctly. Another key reason is to try and stay ahead of and beat inflation.
We have gone through the stats and now know that if we look at the US Stock market for example, its return of roughly 10% is higher than the average inflation number or 2-3% a year.
Whether you decide to invest for early retirement, to buy a house or simply just to live more comfortably, there are of course more variables we need to consider to make sure we are successful.
As we go through the different classes, we will talk about investing ideas in more detail and even discuss some extra bonus content like should I invest during a recession?. Our aim here is to give you the knowledge needed to help you on your investing journey.
Continue onwards through our TBanque Summer School content where well go into even more detail on investing. See you in the next class when we cover can you afford to invest?.
Login to your TBanque account and use the demo portfolio with $100,000 in virtual funds to practise your investing.
TBanque is a multi-asset investment platform. The value of your investments may go up or down. Your capital is at risk.
This communication is for information and education purposes only and should not be taken as investment advice, a personal recommendation, or an offer of, or solicitation to buy or sell, any financial instruments. This material has been prepared without taking into account any particular recipients investment objectives or financial situation, and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Any references to past or future performance of a financial instrument, index or a packaged investment product are not, and should not be taken as, a reliable indicator of future results. TBanque makes no representation and assumes no liability as to the accuracy or completeness of the content of this publication.
