Investing generally means that energy is being used for anything, with the hope that it will return more than it has invested in in the long run. For example, in the financial sector, time, money and energy can be invested in education to earn more afterwards. In other areas it is often said that, for example, a lot of time is invested in training for a sport or the like.
These types of investments are also important, but in this section, I will focus solely on investment in financial assets. This will give you interests, and the money will multiply if no fundamental mistakes are made. Another criterion for me is that as an investor I also get money without having to sell my investment or part of it.
I would like to give you an overview of the most important asset classes.
Shares are parts in a company. By purchasing the stock, you own a part of the company and, if the company pays out part of the profits, you will receive part of it as well. This part is also called dividend, which is derived from Latin and means dividing. In addition to the distributions, the price of the stock will normally rise over time and, ideally, you will receive more money on the sale of the stock than you paid for it. In the worst case, the stock may lose its value completely if the company goes bankrupt. Which will result for you in a total loss.
This asset class is one of the best known and most people understand investing as the purchase of stock through a stock exchange. Very few people although invest in equities because many are very worried about the stock market and most of them are hardly or not at all familiar with investing.
Of course, this does not mean the money you will receive if you stop working in your mid-60s or probably even later. Pensions are fixed income securities. This means that in contrast to the shares at the beginning of a term and an interest rate is set. The most well-known here are probably the government bonds, where you lend states for a certain period money and receive a specific interest rate. Currently you will get more interest because of the higher risk for Greek government bonds, as for German bonds for example. Of course, you can also lend money to companies or other private individuals and receive interest. The biggest problem here is that the institution or person you lent the money can go broke and you get nothing back.
Real estate is for example houses, flats or garages. You can let these properties be used by others and get then rent from it. In addition to the rent, there may also be a value appreciation of your estate, but the property can also lose value sometime. The biggest problem with this asset class is that it is not as liquid as the others. Stocks can always be sold within a few days sometimes even when the stock market is closed on weekends there might be folks around interested to buy over-the-counter and most bonds can be sold quickly as well. For real estate, this can sometimes take half a year, or you have to accept heavy losses in sales depending on the market situation.
If the property is used by the owner, then it is not an investment or if it is, then only a very bad one. This topic would be beyond the scope here.
Investments in commodities such as gold or oil are possible are an option too. There are no fixed interest or dividends that you will get back. That’s why, according to my criteria, commodities are not an investment for me and should at the very most make up a small part of the entire portfolio.
Here everyone has to think for themselves in which asset class (es) they want to invest in and what suits them best to meet their goals. I decided to buy stocks and will focus on it here on the blog. The most important thing is to be well informed, weigh the risks and then start investing. Many are deterred by the complexity and never start. Just do it!
Why should everyone invest?
The simple answer to the question of why anyone should invest can be answered with a single word: compound interest.
Most people think linearly and do not build up any fortune that keeps on growing. This forces you to cover all your expenses every month by exchanging time for money. All people underestimate the compounding effect and, although I have been investing for some time now, I still do it sometimes too.
Only to philosophize theoretically about the compounding effect does not help much, so I would like to illustrate an example, why investing is so enormously important.
Do Millionaires become possible without investing?
I now assume a net yield of 6% for my examples.
We have parents who want to invest a fixed amount right after birth so that their child, if they want to retire at the age of 67, has $1,000,000. How high would this one-time investment have to be if nothing more is ever to be added to the initial investment? What do you think?
It is exactly $21,161 – I was extremely surprised myself, because I also assumed a higher investment at the beginning would be necessary. With this small investment, the child, when retiring, will have a “small” supplementary pension of about $2,000 net per month without ever exhausting the capital asset.
Now we take as an example a family where the parents have saved nothing for the child. The child decides to become a millionaire, but he does not want to invest because the risk is too great. If the adult earns his first money at the age of 25 and has no debts, then he would have to save about $23,900 every year. I do not know what your financial situation is, but I can not and do not want to save $2,000 every month for more than 40 years, then start spending my money again and live well at the age of 67.
I hope that by juxtaposing these two extremes I could make clear how important investing in asset accumulation is. Of course, it is possible to get to $1,000,000 without investing, but it makes no sense at all.
When should not be invested?
Before people come up with the excuse of why they can not invest, I’d like to briefly outline the only exceptions in my view. However, these exceptions only mean that there is currently no investment to be made, as other asset-building measures make more sense at the moment.
The only reason is that there are still debts or no financial protection has yet been established. Loans are deadly for asset accumulation and should first be repaid as swiftly as possible. If there is no financial protection, then you will need to borrow again at the next major issue. After these reasons have been removed, everyone should really start to invest for their future.
What are your thoughts on that subject? Do you agree with me and what are your suggestions? Feel free to share your thoughts with the community here below in the comment box – thank you very much.