Investing involves committing money to a company, government or other entity in order to earn a financial return in the future. It’s the process of using money to make more money.
Why do people invest?
Many people use investments to help them buy a home, send their children to college or build their retirement funding. However, there is no guarantee that you will make money from investments, and you may receive less than the sum you invested. You can also save for the future in deposit or cash accounts, and the interest (although very small and trending downwards) can provide some additional income. The downside to cash savings is that inflation may eat away at the value of your savings over time.
Why do you want to invest?
Investing for income
If you want to generate income from investing, one option available to you is to choose investments that provide regular payments. Investing for income in this way is common with people in retirement who want to supplement their pension income.
Investing for growth
The objective of investing for growth is to increase the value of your investment. If you invest in stocks and shares, for example, the growth you could achieve would be the result of an increase in the share price.
Compound growth
Investing is not just about how much money you have to invest. It’s also about how much time you have to invest it. That’s because of the power of compound growth. The asset accumulates growth from the time of the original investment, and the added earnings are known as compound interest.
How do I know what to invest into?
Knowing what to invest in will depend on the reason why you are investing - and what your financial goal is. You might want to invest money to live off when you retire in 25 years, or to pay for your now 12-year old child to go to university. The time horizons are obviously very different, and will inform your level of risk tolerance.
As a rule of thumb, those with shorter time horizons should be investing more conservatively, while those those investing for longer horizons can choose riskier investments as they don’t need the money for a longer time. For example, if you need to access money from your investment to pay your annual apartment management fee, you have a low-risk tolerance level.
How is investing different from savings and trading?
Investing is different from savings and trading. Investing is associated with putting money aside for longer periods of time whereas stocks are traded on a regular basis and sometimes for short-term gains. Savings are sometimes guaranteed, whereas investments are not. As you’ll see below, there are many ways to invest.
- Stocks
- Bonds
- ETFs
- Funds
- Index Tracker Fund
- Target Date Funds
- Investment Trusts
- Exchange-Traded Commodities
How do I know if I am able to invest?
You don’t need to start with large sums of money to start investing. If you would like to grow your money over a longer period, investing with small amounts of money is a great habit to get into. However, you should assess your current financial situation and ensure that you are in good shape before starting to invest. You may want to consider starting to invest once you have:
Built-up your emergency savings pot. Savings should come first. Before investing, try to make sure you have a separate account you can use to cover expenses during an unforeseen event - typically at least three to six months’ worth of living expenses.
Paid off high-interest debt. By paying off high-interest debt in full, you’ll reduce the total amount you owe faster, and free up money to put toward savings or investing.
Made your pension contributions. If one of your long-term goals is to have a comfortable lifestyle in retirement, make sure you’re making the maximum contribution to your pension fund.
Agreed to take some risk in investing. There is always risk involved in investing, but diversification may help limit your losses if one of your investments reduces in value.
Carried out your own research and are confident that it’s time for you to start investing, and you’re ready to invest for at least 5 years.
While great care has been taken in its preparation, this document is of a general nature and should not be relied on in relation to specific issues without appropriate financial, insurance, investment or other professional advice.
The content of this document is for information purposes only and does not constitute an offer or recommendation to buy or sell any investment/pensions or to subscribe to any investment management advisory service. While the information is taken from sources we believe to be reliable, we do not guarantee its accuracy or completeness and any such information may be incomplete or condensed.
All opinions and estimates constitute best judgement at the time of publication and are subject to change without notice.
Bank of Ireland is regulated by the Central Bank of Ireland. Bank of Ireland is a tied agent of New Ireland Assurance Company plc for life assurance and pensions business. Member of Bank of Ireland Group.
