One of the most misunderstood topics in the world of personal finances and business in general is investing. For many people, especially those that have never invested in their life, stocks and basically any type of investment grade security is synonymous to losing money. These people are clearly misinformed and can drive a newcomer out of the world of investments altogether. But, there is something that these people do not know. A sure fire way to lose money is by leaving it in a low yielding bank account or even worst, stashing it inside a safety box or hiding it anywhere inside the house.
So how can you actually lose money when no one is touching it and you are actually accumulating more and more each month? The culprit is inflation. Inflation is nothing new; you can clearly see its effects with each passing year. Things seem to get more and more expensive as time passes by or at least that is what most people think. Those thinking this way are in for a surprise. Inflation is not about things getting more expensive it is about currency losing value year over year as more and more money is printed. Money is a concept that is manifested as paper currency, gold and in many other ways such as digital funds but what it really represents is purchasing power. The financial power that is necessary to purchase goods or pay for services.
The effects of inflation are devastating to those that store their hard earned cash in unproductive ways. Imagine that $1000 right now could buy you 175 meals. If the same amount of currency can only buy 100 meals after 10 years did you lose money? Perhaps you have the same amount of currency but the purchasing power is dying slowly and steadily. This is one of the most important things that anyone that wishes to have financial success needs to understand. Those that don’t understand this concept are in a real financial disadvantage.
The basic idea behind investing is to combat the effects of inflation and at the same time give a real monetary return to the investor in the form of profits. The earlier in life a person starts to invest the more time those investments have to compound. The power of compounding is what really makes profits soar and is what has created many of the world’s largest fortunes. Investors such as Warren Buffett and others are living testimonies about the power of compounding. People such as Warren know how to calculate risk and how to choose investments that not only combat inflation, but can return big profits over the years.
In the world of finances the higher the risk the higher the profits. Every new investor should know his or her level of risk tolerance to determine what type of investments to make. Not everyone can tolerate the fluctuations of the stock market but this does not mean that someone that has a low risk tolerance cannot invest. There are other types of investments that are less risky like treasury bonds and other government issued securities. Other people may not understand how to choose stocks but want to invest. These people can profit by buying assets in a mutual fund that is run by a very professional and experienced manager.
As you may notice there are many options to choose from some pose almost no risk while others such as stocks from startup companies are very risky and volatile. It all boils down to personal preference. So the next time that a person that doesn’t know anything about finances tells you that if you invest you will lose your money, you can tell them that they have been losing theirs year after year by not putting it to work.