Investing is a great way to make money work for you. You don’t have to rely on your salary to make a living. Instead, you should invest your money to prepare for retirement and generate a passive income. Investing helps you grow your money and gives you some financial security, especially when you retire. It is important to diversify your investment to avoid investment risks such as losses.
In this article, we will help you know what investing is, why it is important to invest and investment strategies you can use.
What is Investing?
Investing is committing money into financial schemes such as stocks and shares, properties, or commercial ventures to earn a financial return. When you invest, you put your money into assets you expect to increase in value over time. In return, these investments generate returns.
Types of Investing Strategies
The following are some of the most common investment strategies for investors:
1. Index investing. This is a kind of investment where investors put their money in a small portion of stocks in a market index like mutual funds or exchange-traded funds. It has low fees and requires little knowledge.
2. Dividend investing. This involves buying and selling shares and stocks of companies. You buy shares when their market value is low, anticipating their prices will increase and sell them at a profit. Investors seek to know if a company has the potential to grow before buying its shares.
3. Technical trading. This is a kind of investment where investors look at the stock price movements and volume. Investors look at patterns to evaluate investments to identify trading opportunities.
4. Value investing. This is a kind of investment where investors look for profitable companies whose stocks are undervalued and invest in them. However, it is not a simple technique to identify such companies and requires patience.
Financial Investment Instruments
There are several investment instruments you can use. They include:
1. Shares and stocks. When you invest in shares and stocks, you are simply buying a unit of ownership of that company. You earn dividends when you invest in shares. Besides, you can sell your shares at a profit when the company grows.
2. Bonds. Bonds are some of the most secure investments. However, they have lower returns. When you invest in a bond, you are basically lending the money to the government.
3. Mutual funds. Mutual funds are investment tools where investors pool funds into stocks, bonds, and shares. Investing in mutual funds helps investors diversify their investment across different instruments.
4. Exchange Traded Funds (ETFs). ETFs work the same way as mutual funds. ETFs combine investments like stocks, bonds, commodities, and currencies.
5. Real Investment Trusts (REITs). REITs are real estate companies that invest in high-income generating real estate properties. Investors pool funds together and invest in trusts. In return, they earn dividends from these investments.
Also read: Ways to invest in your health.
Why is Investing in Your Future Important?
The following are some of the reasons why investing is important in life.
1. Wealth Creation
One of the reasons why investing is important in life is for wealth creation. Through investing, you can build more wealth like have a huge bank balance, accumulate more assets or reach your financial goals faster. Through investing, you get to increase the value of your assets. Investing can help you grow generational wealth.
2. Beat Inflation
Investing is also important in that it helps you hedge against inflation. When you keep your money in form of cash, it continues to lose value due to inflation. In simple terms, cash tends to lose its purchasing power over time. But when you invest it in assets, these assets tend to appreciate at a higher rate compared to the rate of inflation.
Related: How to hedge against inflation.
3. Prepare for Retirement
One of the ways to prepare for retirement is by investing. When you retire, you will still have some income. Some of the best retirement investments include stocks and shares, REITs, rental properties, and immediate fixed annuities. It is best to start investing while working so that when you retire, your investments will be earning retirement income.
4. Generate Higher Returns
The other reason why investing is important in life is that it generates higher returns through profits of capital gains. For instance, you can earn returns by investing in stocks and shares through dividends or capital gains, while real estate can generate rental income and capital gains.
5. Reach Your Financial Goals
If you have some financial goals, one of the ways to meet them is by investing. For instance, you can buy a home using investment returns. If you have some real estate properties, they will be generating high returns that you can use to build your own home. Other financial goals can be buying a car or college education for your children. You can achieve this using investment returns.
6. Compounding Benefits
One of the benefits of investing is that you take advantage of compounding interest. It means that interest you earned the previous year earns you interest this year and coming years. In short, interest earns interest. The interest you earn every year is compounded over the coming years.
7. Reduce Taxable Income
The other reason why it is important to invest is that it helps you reduce your taxable income. When you invest in retirement accounts like 401(k), you reduce your taxable income. Consequently, you pay lower taxes. Besides, when you make a loss from your investments, you can apply the loss against gains from other investments.
8. Expand or Start a Business
Investing is a great way to start a new business or expand an existing business. Many investors like to support other people who are just starting new businesses. By so doing, they take part in job creation and promote the creation of new products.
Downsides of Investing
Investing is good and should be encouraged. It is an important process in wealth creation. However, investing has its own downsides. The following are some of the demerits of investing.
1. Possible Losses
There is no guarantee to generate returns on investment. There is a likelihood to make a loss. Every type of investment like government securities has a risk chance of making a loss.
2. Requires Knowledge
Investing in different classes of assets requires knowledge about finances. For instance, you need to know when to buy and sell your assets to make a profit. You also need to research and find assets with high growth potential.
Summary of Why Investing is Important in Life
If you are looking for ways to grow your wealth, then you need to consider investing. Investing helps reach your goals, and hedge against inflation. Instead of keeping your money in form of cash, put it into investment and earn returns. Look for investment instruments with high growth potential and put your money in them. Finally, diversify your investment to avoid investment risks such as losses.