Investing money over long periods of time can result in the accumulation of large amounts of capital. It’s more productive than spending on consumption or depositing money in a bank. But you should invest wisely to earn the best returns for the risks you take. This VanEck ETF Academy is a primer for aspiring investors and breaks down key concepts and terms about ways to invest.
Investing for beginners
When investing for beginners what are the three golden rules?
- Adopt a long-time horizon;
- Keep costs low.
We discuss each of these rules in the academy pages.
Investing money means allocating capital to a company or government to make a profit or an income. People most frequently invest in securities such as shares or bonds. Increasingly, they also invest by way of exchange-traded funds (ETFs). There’s a growing trend to invest your money in a way that not only achieves a financial return, but also does environmental or social good.
Investors: No longer a privileged group
It’s thought that just the most affluent among us invest, but there’s no reason why investing can’t be more popular. Yet the barriers to investing are being broken down, making it more accessible to everybody. Nowadays, the cost for an online broker account is minimal; so too are transaction costs. Just a few tens of euros can buy a diversified investment portfolio. How? ETFs have made it possible. Anybody can be an investor!
Investing: Top reasons to invest
It’s well documented that investing can generate significant capital increases for the patient investor over time. What’s known as “compound interest” can ratchet up returns year after year – a phenomenon the great Albert Einstein is reputed to have called the “eighth wonder of the world.” If an initial investment of EUR 1000 yielded a 20% return in a single year, it would be worth EUR 1200. But if your investment again yielded 20% in the following year, your capital would not grow to EUR 1400, but to EUR 1440. Why? Because the previous year’s EUR 200 profit would generate a return; not just the initial investment. Over longer periods, even many decades, individual investors can accumulate substantial capital. So, it’s important to start investing as early in life as possible.
Investors should consider risks, i.e. risk of capital loss, before investing.
Investing money offers three broad choices: stocks (1), bonds (2) and bank savings (3). Historically, stocks provided the highest returns, but they have also been riskier. When financial markets correct, stocks can lose significant value. Bank accounts are more stable, but with interest rates close to zero, these hardly pay any return or even cost more than they return. And, banks can fail. Historically, bonds sit between stocks and bank deposits in terms of return and risk. True to the basic rules of investing, these choices show the trade-off between risk and return. In order to achieve higher returns, one typically needs to accept a higher level of risk, and vice versa.
Learning to invest
There are many books about learning to invest – but there’s no substitute for experience. Start to invest slowly and, over time, you will become more skilled and experienced.