Investomania

Don't just work for your money, make your money work for you!

During my yet, relatively short career in the world of banking I've noticed how savings and investments are recommended everywhere. Almost every time when you are doing your affairs in the local branch of your local bank, you are recommended to engage yourself in all kinds of methods of investments and savings. The news have their own 10 min section dedicated only for the economy and the stock market. Even entire channels and newspapers have been established just to tell you how profitable it is to invest and save.

This investomania in the modern society indeed tries to push everyone to invest their money into funds, stocks, ETF's, bonds and treasury bills, rather than keep your fortune in your account. So is it really as smart as the society tries to tell you?

Yes it is.

Consider the following scenario: You have a decent amount of money in your current account. You have also a debit/credit-card attached to your account. If you lose your card or become a victim of a fraud, the risk of someone figuring out how to use your card to empty your account increases significantly. If you lose all your funds in your current account, you have absolutely nothing left.

This can be easily solve by establishing your own savings account. In a savings account, your money is completely safe. The money stays there and you don't have to fear that your money would lose any value in case of 2008-kind of stock market crash for example.

This is quite common way of saving nowadays. However, during the time that the interest rates are in all-time low, the interest paid to your savings account is in practice 0,00 %. Currently the inflation rate in Finland is roughly 0,5 %, which means that you are constantly losing 0,5 % on the purchasing power of your savings. You are losing for the economy.

However, a savings account is a preferable place for your money if you are saving small amounts in short-term or building up our spare funds in case of unemployment or a broken washing machine.

Let us consider another scenario: You've invested your funds to the stock market, either through an investment fund or directly to shares. Your money may lose some of its value, or in the extreme case all of its value, but you can make money from your savings.

For example: You decide to save 100€ every month to a fund that could offer you a 3,5% return for your investments. That means that the 1200€ you invest during the year, becomes 1222€. Compared to saving to your savings account, you end up with the 1200€.

By constantly saving to that fund and being able to get 3,5 % return every year, in 50 years you have 158 400€, compared to 60 000€ that you might have invested in your savings account. Quite a difference.

A more profitable and risky choice would be to invest directly in the stock. In this case if you manage to get a 8 % annual return from your investment, investing 150€ monthly for 50 years you could become a millionaire in 50 years from now.

So what's the catch here? The catch is the risk. By investing into funds and stocks you must face the fact that in some point of time, your money is going to lose some of its value. We all have seen the horror stories of 2008 where the stock market crashed and people lost significant amount of their savings and investments. There is no return without risk, and no risk without return. If someone offers you high returns with zero risk, you can be sure of it's being some kind of a Ponzi-scheme.

However, losing your money in the long-run is relatively uncommon. Although you can in practice lose 4 % from your investments in a week, the risk of losing value becomes smaller when the time span of investing is increased. Statistics show that the value of the stock market has risen in 75 years out of the past 100 years. The Standard & Poor’s 500 Index, a benchmark for U.S. stocks, for example, has had on average a 7 % return between the years 1950-1999. If you can tolerate losing the value of your investments in the short run, it may pay off in the long-run. However, we all must also keep in mind that history doesn't necessarily tell us the future. It's all about assumptions.

That's why banks and financial institutions have recommended you to invest  for your retirement days. If you think about it, 150€ in a month is 5€ in a day. If you are smoking or drinking excessively and trying to get rid of it, try investing your daily pack of cigarettes or your daily pint either to a fund or directly to shares.

That's what I've been doing for quite some time now. Choosing my own monthly amount, I've been investing directly to shares and seeking for that 8 % annual return. My strategy is to invest in publicly listed companies, which have a relatively low price-earnings-ratio compared to the index's P/E-ratio, a high earnings per share-ratio and whose dividends are expected to grow. Surely compared to investing into funds this kind of investing requires some of my time to keep up with the stock market and its fluctuations, but for now I'm okay with that.

And what are the benefits of my strategy? Shares with relatively low price-earnings ratio compared to the index, depending on the industry, usually can be considered as somewhat underpriced. This means that these shares have a high potential of increasing their value. By investing into shares that offer dividends, re-investing those dividends into the shares to creates compound interest. If the dividends are received in a growing rate, compound interest could (hopefully) become enough to buy new shares just with the received dividends. Re-investing your profits to create more profit!

And I can warmly recommend you all to consider investing some amount of your money. If you don't have the time, the risk-tolerance or the knowledge to invest in the long-run directly to shares, start investing monthly with a comfortable amount to an investment fund. An amount small enough that doesn't create anxiety if it loses some percentages of its value. If you are unsure how and where to invest, contact your local bank and ask them for advice. As long as you have a smart plan of making your money work for you in the long-run for your days of retirement.

Because what is the purpose of a firm? Nothing more and nothing less than to create wealth for its shareholders.

Text: SW
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