If there is one thing you can start doing today, which is almost guaranteed to bring you wealth, it’s investing.
Just to clarify, investing is not a get-rich-quick scheme. Investing is a long term act you do consistently and with a strategy that will allow your capital to compound and increase over the years.
Investing is what allows the rich to get richer as they understand that the power is in the slow and steady returns. Take Warren Buffet, for example, arguably one of the most successful investors. He started investing from the age of 11, but he made the majority of his wealth from the age of 60 - by this investments had time to grow and compound. Slow and steady is the secret to investing, as well as diversification.
Cryptocurrency should form a part of your overall investing portfolio (not financial advice!), but for true wealth, you should diversify your assets and have a range of different types of assets. This section breaks down the different types of assets you could consider investing in.
Always remember to do your own research and that none of this is financial advice.
Why investing can make you wealthy
Investing can be a powerful pathway to wealth creation, offering the potential to multiply capital and generate passive income. By setting aside a portion of your earnings and putting it to work in various investment vehicles, you can harness the power of compounding and achieve financial freedom over time.
One powerful example of the wealth-building potential of investing is setting aside 10% of your wage from the age of 18. Let’s consider a hypothetical scenario:
Assuming a starting annual wage of £30,000 at 18 years old, investing 10% (£3,000) annually in a well-diversified portfolio with an average annual return of 8% can lead to remarkable wealth accumulation. If you maintain this consistent investment strategy until the age of 65, you will have invested a total of £174,000 over 47 years.
By the time you reach 65, your investment could potentially grow to over £2.1 million, thanks to the magic of compounding. This substantial wealth accumulation is a result of the returns earned on the initial investments reinvesting and compounding over the long term.
Investing also provides opportunities for generating passive income through dividends, interest, or rental income. As your investment portfolio grows, the income generated can supplement your regular earnings and provide financial security in retirement.
It is important to note that investing comes with inherent risks, and returns are not guaranteed. However, by diversifying your investments, being consistent in your contributions, and staying invested for the long term, you increase your chances of building substantial wealth over time.
Investing requires discipline, patience, and a long-term perspective, but the potential rewards can be life-changing. Whether you are saving for retirement, financial independence, or other goals, investing wisely and early in life can significantly enhance your wealth-building journey and open doors to a more prosperous future. This example above relates to stocks, however, there is opportunity for wealth through diversifying and including cryptocurrency in your portfolio. It is important to note that the cryptocurrency market is still very new compared to the stocks markets, so while there isn't so much past data to go by, since Bitcoin's birth, it's had a return of investment of 31735.27% as of July 2023) - that's 145.77% annualised.
From 2011 to 2023, the Vanguard S&P 500 ETF delivered an average annual return of 15.74% and a total return of 173.14%. While those numbers aren’t too shabby, Bitcoin’s average annual return for the same period was a whopping 819%, and its total return was 9,012%. (Source: https://www.goodfinancialcents.com)
Different types of investments
Stocks represent ownership in a company and offer investors the opportunity to participate in the company’s growth and profitability. By purchasing shares of a publicly traded company, investors become shareholders and can benefit from capital appreciation and potential dividend income. However, stock prices can be volatile, and investing in individual stocks requires careful research and analysis.
Bonds are debt instruments issued by governments, municipalities, or corporations to raise capital. When investing in bonds, investors lend money to the issuer in exchange for regular interest payments and the return of the principal amount at maturity. Bonds are generally considered lower risk than stocks and provide fixed income and predictable returns.
Real estate investing involves purchasing properties, such as residential homes, commercial buildings, or land, with the goal of generating income and potential appreciation. Real estate can provide cash flow through rental income and offers diversification from traditional financial markets. However, real estate investments require careful consideration of property location, market conditions, and maintenance costs.
Bitcoin and digital assets represent a revolutionary shift in the financial landscape, offering a decentralised alternative to traditional currencies and assets. While the S&P500, representing 500 of the largest publicly traded companies in the U.S., has historically provided an average annual return of around 7-10% after adjusting for inflation, Bitcoin and select digital assets have shown the potential for significantly higher returns due to their novel use cases, limited supply, and increasing global adoption. However, they come with heightened volatility. As a diversification tool, they can complement traditional portfolios, but investors should be aware of their inherent risks and carry out due diligence.
Having an investment strategy is crucial to achieving long-term financial success. It provides a structured approach to investing and helps you to make informed decisions based on your financial goals, risk tolerance, and time horizon. A well-defined strategy can also help you to navigate market fluctuations and emotional biases - the crypto markets for example, can be very volatile and can work your emotions - having a strategy can make it so much easier to navigate.
There are various investment strategies, each with its own objectives and approaches. Some common strategies include:
Buy and Hold
This strategy involves buying investments and holding them for an extended period, typically years or even decades. It is based on the belief that over time, markets tend to rise, and long-term investors can benefit from compounding returns. This strategy can be used for all types of asset classes. In cryptocurrency, the term HODL means to buy and hold your crypto.
Value investors seek to identify undervalued investments in the market. They look for companies or assets trading below their intrinsic value and aim to profit when the market eventually recognises their worth.
Growth Investing Growth investors focus on investing in companies with significant growth potential. They prioritise companies that are expected to experience above-average earnings growth, even if their current valuations may appear high.
Diversification Diversification involves spreading investments across different asset classes, industries, or geographic regions. By diversifying their portfolios, investors aim to reduce risk and protect against the potential decline of any single investment.
Dollar-Cost Averaging: This strategy involves investing a fixed amount of money at regular intervals, regardless of market conditions. By consistently investing over time, investors can potentially buy more shares when prices are low and fewer shares when prices are high, reducing the impact of market volatility.
Ultimately, the choice of an investment strategy depends on an individual’s financial goals, risk tolerance, and investment knowledge. At the start of your investing journey, you'll just be finding your feet and learning the basics, so don't put pressure on yourself to have it all figured out, but do consider that you should be investing with some kind of strategic approach!