Uncomfortable Facts About Investments: For Beginners
Investment is scary. It's essentially a gamble. Yet investments are what make the rich richer. It gives them extra sources of income that would protect them against a recession.
Because of this, the working class assumes that investing is only for the rich. But that couldn't be further from the truth. Anyone with money to spare can invest. One hundred pesos can be invested in savings, for example. If you invest your PHP100 every day, it can grow into PHP36,500 in a year.
But if you want high-return investments, your strategies should be more complex than saving money. This is where things get tricky and risky. Investments with high returns pay out after a long time, about ten years or more. As such, investment novices who are in a rush to get rich look for other ways to grow their money faster. So when they are presented with an opportunity to be a millionaire in one year, for instance, they take the bait immediately. And then they would realize too late that they had been scammed.
Knowing the uncomfortable truths about investing can help you avoid that pitfall.
1. Investing won't make you rich instantly.
Perhaps this is the hardest truths of them all. Some advertisements may make it seem like investing will grow your income fast, but in reality, it's a slow and long process. Even short-term investments take years to pay out.
Short-term investments usually take five years to yield. Examples include treasury bills (T-bills) and time deposit accounts. They are low-risk securities, so your chances of earning compared to losing are high. However, low risk also means low returns. You may have to invest in multiple short-term securities to feel your wealth grow.
2. Investing is supposed to be risky.
If someone approaches you, claiming that your money can grow in a few months without risks, be skeptical. A claim that's too good to be true is usually a scam. It victimizes one in every 100 Filipinos. Just this year, in fact, the Securities and Exchange Commissions (SEC) have identified 28 entities with malicious transactions.
Whether an investment yields high returns or not, it's supposed to be risky. Low risk doesn't mean your money won't reduce in value during a recession. It simply means the security is less vulnerable to inflation and other economic events. On the other hand, high-risk investments are more prone to drop in value during economic downturns. But during an economic boom, it earns significantly and generates a hefty payout.
If you want security that's between low-risk and high-risk, there are safe high-yield corporate bonds. It's a moderate to high-risk security with a higher interest rate. They may be issued by highly leveraged companies or those experiencing financial difficulties. Startups and smaller companies may also offer them to offset their risks or unproven operating histories. You should have a good understanding of both the potential rewards and risks of this investment, though. As such, it's not suitable for beginners, but if you have a lot of money to spare, it might be worth trying.
3. It takes years to double an investment.
When an investment matures, the money isn't automatically doubled. Sometimes, it has only grown by 10%, 20%, or just 5%. That's often the case with low-risk and low-return securities.
Under the Rule of 72 - Years to Double equals 72 over Interest Rate - it takes nine years to double a $1,000 investment. Investors use the Rule of 72 to estimate the number of years required to double their investments. It provides an approximate timeline, not necessarily accurate. If you want to know the exact doubling time, you need to use the complete formula, which includes the natural log function in your calculator and compounded interest rate per period. So, for instance, if you want to know how long it would take to double an investment with an 8% annual return, the formula should look like:
Time to Double = ln(2) / ln (1 + (8 / 100)) = 9.006 years
The result is closely similar to what the Rule of 72 has found, which used the formula 72/8 = 9.
4. Your money won't grow by much in a savings account.
A savings account is essential, but having it as your only investment won't do much for your money. It earns a meager interest rate that you won't even feel. In addition, it's easily accessible, so it's hard to resist the temptation to make withdrawals and spend.
Hence, use your savings account only for your emergency savings or shopping budget. The money for your long-term goals, like buying a house or your retirement, should come from investments, ideally.
These investment facts may make the endeavor scarier than it already sounds, but don't be discouraged. It's only intimidating in the beginning. When you get the hang of it, you'll invest in more securities and take more risks without feeling scared.
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