Before you start investing, it’s fair to ask yourself an obvious question: Why invest?
People usually invest for two main reasons:
- To earn a return
- To keep ahead of inflation
Earning a return
Getting a return on your investments—or making money from your investments—is the primary motivation for most investors. It basically means that you’re putting your money into a vehicle in which it will grow.
For example, if you buy $50 in stocks, you’re hoping to see that money grow so that your stocks will be worth more than you initially purchased them for. While returns can be positive or negative (all investments involve risk), over the long run, markets and returns have tended to trend upwards:
Your investments actually earn you money in three different ways:
- An increase in share value—an increase in a company’s stock price
- Dividends—a portion, via a cash payout, of a company’s earnings to shareholders.
- Interest payments—a periodic interest payment on debt to bondholders.
Staying ahead of inflation
Aside from making money via a return, investing can help you stay ahead of inflation.
Inflation is the tendency of money to lose value over time. It refers to the rising cost of goods and services with time, and effectively, measures the rising cost of living.
The inflation rate has slowly crept up over the past several years and is eating into the paychecks of many Americans. While you’re not guaranteed a return on any investment, investing your money is a way to try and stay ahead of inflation—hopefully, your return will outpace the rate of inflation.
If the inflation rate is currently 2%, for a simple example, and your portfolio had a return of 7%, your real return would be 5%.
For comparison, the average annual return for the S&P 500 index over the past 90 years is 9.8%. If you were to invest your money into a fund that tracks that index, your money would stay way ahead of the inflation rate.
Make investing a habit
How can you get in the habit of investing? With Stash, all you need is $5 and a disciplined approach. Here are some tips:
- Invest a little bit on a regular basis—Even small investments add up over time.
- Hold onto your investments—Buying and holding helped make Warren Buffett rich, and the strategy could work for you.
- Diversify your investments—Don’t put all of your eggs in one basket, in other words. Investing is risky, but you can mitigate that risk with a diversified portfolio.