Getting to understand the investment world better, sounds so overwhelming. But if you have just four or five terms in your arsenal, you’ll have the basic building blocks for understanding and impressing your mates.
Let’s start with investing itself, just to paint the background.
To invest means you’re putting your money to work so that it can grow faster than, let’s say, just gathering dust in a current account in a bank.
Time horizon
The first thing is to decide for how long you need your money to grow. For retirement money, you want to be in the share and other markets for as long as you can. You must make provision from early on for when you will no longer earn a salary. Even a little money every month will go a long way, because of compound interest, which we explain below. If your need is more immediate, such as education savings for your child in five years’ time, you’ll have a slightly different approach.
Stacking growth on growth
The funny term “compound interest” just means you’re adding interest on top of interest. When you invest your money, it grows by a certain percentage every month, and we call that amount your interest growth. This means every month, your basic amount available for growth is slightly bigger. You have started earning interest on, not only your original investment amount (or capital) but also your interest. And this is the magic investment gurus refer to, the multiplier effect that over the long term boosts the growth of your investment tremendously. Think of it as a ball of clay that gets bigger as it rolls along.
Taking risk on the chin
The amount of risk we can handle is the guardrails of how much hammering your nerves can take, so to speak. We may be so scared of losing money that we don’t invest at all. This in itself is risky, because if you are not invested, your money cannot grow to beat inflation, which eats away at your future buying power. Also, if money is invested in the long term, it has time to recover from a setback as markets tend to ebb and flow. If you invest in the short term, you can be a bit more wary. But there are more or less risky investment options suited for every kind of personality.
The best spots for your money
The big word “asset allocation” just means you can allocate your money to different kinds of assets. The share markets, where the growth is best, are the most risky, and a bank account, where the growth is very low, is the safest. In between, are also options such as property or bonds.
Betting on more than one horse
The tongue twister “diversification” is closely linked to allocating your money to different assets. It means that you should not put all your eggs in one basket. It also means you shouldn’t follow your cousin’s advice to invest all your money in a “hot share”. This is next to Ponzi schemes the easiest way to lose money. Diverse investments mean you spread the risk over various kinds of assets, and when one does better and the other worse, you are not exposed to only the bad performer.
A financial adviser is the best person to explain how these terms integrate to make up the investment world. They are best qualified to help you determine how much risk you can handle, and how much you need to save, and for how long, to be able to afford your various needs in future.
Written by Andile Jonas, Head of Marketing at Momentum Savings