Investing
101
Intro to Investing
Why invest?
Investing involves taking reasonable risks to earn rewards and build wealth. For
most people it is the safest, most convenient, and most effective way to build
wealth. Investors build wealth in order to achieve financial goals - buying a
house, buying a boat, paying for college, living a comfortable retirement - goals
that cannot be met by a paycheck. It requires discipline and effort, but the rewards
can be extraordinary.
A lot of people have the preconceived notion that investing is gambling. Investing
is similar to gambling in that it requires money, and you are taking a risk. But
that's pretty much where the similarities end. The risks can be managed so that
the odds are in your favor, and you're betting on the continued growth and success
of the world economy - a much safer bet than the Pass Line. And unlike gambling,
the longer you stay invested, the easier it is to win, and the greater the return
you are likely to make. This is due to the principle of compounding.
How investing works - Compounding
Compounding is a mathematical phenomenon that basically means the longer you stay
invested - and reinvest your earnings - the faster your money will grow. For example,
investing in portfolio with a 9% return will return 9% over the first year. However,
if you stay invested for 20 years, and reinvest your earnings (assume a constant
9% rate) your overall return will be 460%! Twenty years is a long time, but take
this into consideration: 460% / 20 = 23% -- This means that if you were to withdraw
your gains every year, in order to achieve the same return you would have to realize
a 23% annual return (a lot more difficult to do than 9%). Therefore, the two important
keys to taking advantage of compounding are:
- Leaving your money invested in the markets for the long run
- Reinvesting your income and gains
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