Why investing matters?
Contributor: London Stock Exchange |
Everyone has financial goals. You may want to fund your retirement, help your children with their education or with important life events, such as buying a home.
Grow your money
Investing in assets such as company shares offers you the potential to grow your money at a quicker pace than would be possible if you only put your money in a bank or building society account and received regular interest.
Investors aim for higher returns by purchasing assets which can grow over time. Although these investments may be more volatile than money in the bank, investing over a longer period provides an opportunity to recover from any short-term falls and benefit from any rise in the market.
The FTSE All-Share Index, for example, achieved an average annual return of 6.4% in the last 25 years between 1993 and 2018. This does not tell the whole story, however, because there were significant variations and those who invested over a longer period were the most likely to benefit.
Before you invest, consider your wider financial position and whether you should pay off any debts. For example, if you have £5,000 outstanding on a credit card charging interest at 19%, it will cost you £950 a year to pay back the debt. Your investments are unlikely to match this return so it can be sensible to pay the credit card off before you invest.
Benefit from compounding
Since you are considering investing, you probably know that rising asset prices could help your money grow comparatively quickly. You may not be aware, however, of the power that compounding has to give your investments a significant boost.
Compounding is the process by which investment returns are reinvested and generate further gains, causing a snowball effect that can see your money grow at a faster rate. Einstein reportedly called this ‘the eighth wonder of the world’ and the figures below go some way towards explaining his enthusiasm.
Imagine you invested £100 in a fund that returns 7% in an average year. After the first year it would be valued at £107, and provided you leave the money alone, it will continue to earn 7% a year on the new amount. The longer you leave the investment with the interest compounding, the faster your money will grow.
To give a more concrete example, if you saved £200 a month for 40 years you would end up with £96,000. But if you invested the money at a growth rate of 7% and reinvested the income you would end up with £528,025.
Have a positive impact
As an investor, you will play an important part in the economy by providing the money that businesses need to grow. Companies come to the capital markets for funds to boost research and development, launch new products and projects, create new jobs, buy new equipment and open new facilities.
But you may want to go a step further and ensure that your money is used to help businesses that reflect your ethical beliefs. In the past, that simply meant screening out the shares of companies based on factors such as sector, but these days the Environmental, Social and Governance (ESG) operations of all listed firms are coming under scrutiny.
As a result, more and more companies are striving to communicate their performance in areas such as human rights, health and safety, corruption and transparency, both clearly and accurately. This information allows ethical investors to actively invest in companies that are tackling such issues effectively.
Some believe that a good ESG performance indicates strong management which could, in turn, lead to good investment returns.
You can discover how ESG-friendly companies are by researching news and data in their annual reports. FTSE Russell, runs the FTSE4Good Index, which provides investors with a benchmark of companies from around the globe that are meeting ESG targets.