How to start investing: the keys you should know
How to start investing
At Agisa we understand that starting to invest can seem overwhelming for many people. Lack of knowledge and uncertainty can lead to doubts about how to take the first step into the world of investments. In this article, we will provide you with clear and concise information on how to start investing. Our goal is to provide you with the knowledge you need to make smart financial decisions and achieve your long-term financial goals.
Keep in mind that every investment has risk, and every investment requires some initial capital to start investing. There is no such thing as a short-term investment with low risk and high return.
The first question to ask yourself is: How much money am I willing to invest?
It is very important to know how much money you want to invest to start with, and this same question could be accompanied by How much money are you willing to risk?
What does risk mean when we talk about investments?
Risk, when we talk about investments, refers to the possibility that the value of an investment will fluctuate or decrease compared to its initial value. In other words, it is the uncertainty associated with the probability of losing some or all of the capital invested.
Risk is present in all forms of investment and is an inherent element of seeking returns in excess of those offered by traditional savings options. Each type of investment carries different levels of risk, and it is important to understand and assess them before making any investment decision.
What types of risks are there and how can we classify them?
- Market risk: This refers to the possibility that asset prices, such as stocks or bonds, will fluctuate due to market factors such as supply and demand, economic or political events, among others. This type of risk is virtually unavoidable and affects all investments.
- Credit risk: The risk that the issuer of a bond or debt instrument will not be able to meet its interest or principal payments. The lower the issuer's credit rating, the higher the associated credit risk.
- Liquidity risk: The inability to convert an investment into cash quickly without incurring significant losses. Some less liquid investments, such as certain real estate or structured products, may require more time and effort to sell and earn the desired return.
- Inflation risk: Refers to the possibility that inflation will erode the purchasing power of the money invested. If the rate of inflation exceeds the rate of return on the investment, it may lose value in real terms.
Imagine you invest your first ¤5,000...
It is important to mention that investment results and returns are subject to variables and cannot be predicted with certainty. However, we can give you some general examples of possible returns depending on the type of risk and the percentage of profit. Please note that these are examples only and actual returns may vary.
Low risk tolerance (conservative): If you opt for low-risk investments, such as time deposits or fixed income investments, you could earn an annual return of approximately 2% to 4%. This would mean that your ¤5,000 could generate between ¤100 and ¤200 in annual returns.
|Amount Invested||Annual Yield (2-4%)|
|100 ¤ - 200 ¤
200 ¤ - 400 ¤
500 ¤ - 1.000 ¤
1.000 ¤ - 2.000 ¤
2.000¤ - 4.000¤
5.000¤ - 10.000¤
10.000¤ - 20.000¤
20.000¤ - 40.000¤
Moderate risk tolerance (balanced): If you have a higher risk tolerance and decide to invest in a combination of stocks and bonds, you could earn an average annual return of approximately 6% to 8%. This would mean that your ¤5,000 could generate between ¤300 and ¤400 in annual returns.
|Amount Invested||Annual Yield (6-8%)|
|300 ¤ - 400 ¤
600 ¤ - 800 ¤
1.500 ¤ - 2.000 ¤
3.000 ¤ - 4.000 ¤
6.000 ¤ - 8.000 ¤
15.000 ¤ - 20.000 ¤
30.000 ¤ - 40.000 ¤
60.000 ¤ - 80.000 ¤
High risk tolerance (aggressive): If you are willing to take on more risk and opt for riskier investments, such as stocks in growth companies or investments in startups, you could earn an average annual return of approximately 10% to 12%. This would mean that your ¤5,000 could generate between ¤500 and ¤600 in annual returns.
|Amount Invested||Annual Yield (10-12%)|
|500 ¤ - 600 ¤
1.000 ¤ - 1.200 ¤
2.500 ¤ - 3.000 ¤
5.000 ¤ - 6.000 ¤
10.000 ¤ - 12.000 ¤
25.000 ¤ - 30.000 ¤
50.000 ¤ - 60.000 ¤
100.000 ¤ - 120.000 ¤
And these numbers do not take into account compound interest...
Compound interest consists of accumulating returns on previous returns. In other words, it is an ally for accumulating wealth in the long term. This interest is added to the initial capital, on which new interest is generated.
In this case, money has a multiplier effect: the capital grows at the end of each period to which interest is applied, so that the next interest will be set on a larger capital base, and so on.
If you are thinking of investing, you should know that compound interest is your greatest ally.
Let's use an example to make it more visual and easier to understand. Let's say you are an aggressive investor and your portfolio yields at a level of 10% per year. You have 10,000 euros in that account. At the end of one year, 1,000 euros in interest will have come in.
You now have 11,000 euros, which you decide to keep in that account with the same conditions. After the second year you will have 12,100 euros. In other words, you will have paid in more during the second year (1,100 euros) than in the first year (1,000 euros) because the returns multiply until you decide to get that money back.
Let's suppose that after 10 years you decide to withdraw the money you had deposited in the account, which had been 1,000 euros. During that time the money will have grown to 25,937 euros. You will have more than doubled the money you initially deposited in that account! On the other hand, if you choose not to reinvest the interest, i.e. withdraw it from the investment every year, at the end of 10 years you will have 20,000 euros, almost 6,000 euros less than with compound interest.
After looking at the example, let's break down each of the ingredients in the recipe of our compound interest calculator. They are as follows:
Initial capital, which we will call C0
The annual interest rate, which we will call Ti
The period of time the investment lasts (^t).
Final capital = C0 x (1+Ti) ^t
We transfer the data from the example to the formula (initial 10,000 euros with an interest rate of 10% for 10 years):
Final capital = 10.000 x (1+0,1/1) ^10= 25.937 euros
Compound interest will allow you to multiply the initial 10,000 euros by four within 15 years. On the other hand, without reinvestment, it would take you more than 25 years to see your investment grow by four times.
Remember that these examples and the returns may vary. Financial markets are volatile and different investments have different levels of risk and return potential. Thorough analysis, diversification of investments and professional advice are essential to maximise your chances of earning returns appropriate to your situation and objectives. Diversifying allows you to spread your resources across different asset classes, geographic regions, industry sectors and asset classes, you can reduce the negative impact of an individual investment that has suffered losses. Diversification allows you to balance risks and take advantage of potential growth opportunities. Taking controlled and well-diversified risks is an essential part of the investment process and can create the opportunity for higher returns over the long term.
However, it is essential to emphasise that risk management must be supported by a trained financial advisor. An AGISA financial advisor can help you assess your risk tolerance, understand the level of risk associated with different types of investments and recommend an investment strategy according to your personal objectives and circumstances. Professional advice can help you make informed decisions, balancing risk with optimising returns to achieve your financial goals.
It is important to note that past performance is no guarantee of future performance. Financial markets are unpredictable and can be subject to a number of economic and political factors that can affect returns.
Remember that risk is an inherent part of the investment process, but with the right knowledge and the right advice, you can make sound financial decisions that allow you to achieve your goals and build a solid financial future.
FAQs (Frequently Asked Questions):
1. How do we measure the level of risk?
The level of risk is associated with the type of investment you choose. Safer and more stable investments, such as government bonds, offer lower risk, but also lower returns. On the other hand, equity investments may offer a higher return, but also carry a higher risk of volatility.
2. How long does it take to see results from my investments?
It depends on several factors, such as the type of investment, the state of the market and your objectives. Some short-term investments, such as day trading, may offer faster results, but also carry greater risk. In contrast, longer-term investments, such as stocks or mutual funds, may take longer to generate significant results, but also tend to offer greater growth potential over time. The minimum investment horizon we recommend is 3-5 years.
3. How much money do I need to start investing?
There is no set minimum amount to start investing. You can start with a small amount and make additional regular contributions. The important thing is to form the habit of investing and adjust the amount to your financial capacity. Many investment platforms offer options to start with small amounts and add more funds as you are ready.
4. Where should I start investing?
It is advisable to start by establishing your financial goals and investment timeframe. Then seek professional advice to identify the right investment strategy for your needs and risk profile.
5. What are the most common investment options?
Investment options can include stocks, bonds, mutual funds, real estate, among others. Each option has its own characteristics and level of risk. It is advisable to diversify your investments to reduce risk.
Remember to set your financial goals, assess your risk tolerance, familiarise yourself with investment options, seek professional advice and keep a long-term focus. Agisa's team of financial advisors is here to help you at every stage of your investment journey. Don't hesitate to contact us for more information and to start investing in the smartest way possible.