Investments are gaining popularity. No wonder, investing is now available to everyone, easier than ever before. The importance of investing is further reinforced by the current double-digit inflation, which fully shows what happens to our money when it simply remains in a regular bank account. But there may be many more reasons to invest.
Invest… why?
Constantly rising prices reduce the purchasing power of our savings. In other words, with the money saved (for example, for a month or half a year) we will be able to buy less than before. The effects of current inflation have certainly been felt by everyone, but it is wrong to think that inflation appeared suddenly. Price increases are a normal economic phenomenon, and when they are under control, they are considered a positive phenomenon.
That is why the inflation target of central banks is usually around 2% per annum. This is, so to speak, a friendly level of inflation that is not felt even over several months or years. However, in the long run, even such a very low level of inflation has a negative impact on our savings, which is perfectly illustrated by the example below.
The table shows how our money loses when prices rise by 2% per year. Variant A presents savings of PLN 500,000. If you never invest them and let them work for you in some way, their real value will drop to $340,000 within 20 years. This is a decrease in value of 32%, nearly a third of the accumulated funds. Variant B assumes that each year you can save PLN 20,000 per year by starting from scratch. In this case, the amount saved over 20 years will amount to as much as USD 400,000, although their real value will decrease due to inflation and will amount to USD 332,000, i.e. 17% less.
Investing is an essential weapon against inflation
You shouldn’t ignore inflation because it’s the invisible thief of our money, and fighting it is one of the primary reasons people invest.
The very term “investing” may seem exotic or fearful to some. Fortunately, today there are products available on the market that meet the needs of even the least experienced investors. Lack of sufficient knowledge is no longer a barrier, and certainly should not be an excuse to let your money lose value lying aimlessly. As historical performance shows, markets grow in the long term, and this fact is used by the range of different investment products available on the market. They allow you to invest safely, low-cost, easily, small amounts, even for people who are not yet experienced in investing. A great example of a platform offering such products is Portu.
Financial markets are growing in the long term
The main reason why it is worth investing may be precisely the fact that the markets are growing in the long term. Stock markets have over 150 years of history, during which they have witnessed many events – two world wars, the Great Depression in 1929-1939, the stagflation era in the 1970s, the bursting of the dotcom bubble in 1999 and 2000, the financial crisis of 2008 or the coronavirus pandemic. Against all odds, however, the markets recovered and continued to rise.
How high a rate of return can you expect when investing in the stock market? The performance of the main US stock index, the S&P 500, has averaged just under 10% per year over the past 30 years. This is well above the central banks’ inflation target. However, it is important to recall the main rule of investing – past profits are not a guarantee of future profits. Despite this, we can say with great probability that the global stock market will continue to grow, so those who decide to invest in the long term should protect their funds against inflation, as well as multiply their value.
Investing as a way to make your dreams come true
Due to the fact that investing allows you to increase the value of financial resources above the inflation rate, it is also seen as a means to make dreams come true, which for many is a very important reason to invest. If you have a specific goal in mind, such as buying a car, apartment or house, or you want to secure your children for the future, you need to prepare an investment plan that will help you achieve your goals. A model investment plan consists of three elements: what to invest in, for how long and how much.
Above we present a model of the expected development of investments at the Port. This model assumes an initial investment of USD 4000 with monthly regular payments of USD 200, over a period of 10 years. The total net contribution for this period will be PLN 28,000. Choosing the risk level at level 8, the expected result, assuming a neutral scenario, is PLN 47,414. The optimistic scenario assumes a result of PLN 82,693, the pessimistic scenario predicts a result of PLN 27,795. You can create your own model on our trading platform.
Markets are falling
Many people are discouraged from investing by the fear that the markets may see sharp declines. After all, no one wants to lose their hard-earned money. Currently, we are also witnessing a relatively large decline in the markets. However, we believe that this is another of the many reasons why it is worth investing. Why?
The chart above shows the behavior of the stock market over the past 65 years. We can see that declines are a completely natural part of the evolution of the market. It has happened many times that after each big decline, indices have recovered their losses and then reached new highs.
Another fact is that a bear market, which is characterized by sharp declines, usually lasts for a very short time (only once did it last more than two years, during the financial crisis in 2008). On the other hand, a bull market, which is characterized by increases in the market, always lasts longer. Translating this into the current situation, it seems that it is only a matter of time before the situation turns around and the markets skyrocket. It is also worth looking at how much markets are rising after a period of decline. Usually, these are tens or even hundreds of percent, which is why it is worth perceiving the downturn as an opportunity to buy securities at attractive prices.
A way to build wealth
We guess you probably weren’t born with the talent and passion for investing that Warren Buffett did, but that doesn’t mean you can’t follow his rules. The principle of compound interest works the same for everyone and shows in a simple way that investing has a snowball effect. The compound interest effect is most visible in the long term, which is perfectly illustrated in the graphic below. It shows the increase in Warren Buffett’s wealth with his age.
Buffett started from scratch, but thanks to above-average results, regular and long-term investing, he managed to earn his first million at the age of 30. At the age of 52, it was already $376 million, and four years later his fortune reached $1 billion. Now, Buffett, who is over 90 years old, has a fortune of up to $100 billion, being one of the richest people in the world. The basic principles of investing are therefore consistency in investing (for example, monthly payments) and a sufficiently long investment horizon.