The Virgin Investor. Virgin, ‘A person who is inexperienced in a particular context.’ Investor, ‘Someone who puts resource into financial schemes, shares, or commercial ventures to achieve a return.’
Starting out in investing money can be an intimidating task. With such a wide scope of investment options, where would someone even begin? Many products also bear the disconcerting warning words,’ The value of your investment can go up or down,’ or,’ You could lose all your initial investment.’ Thinking about the potential to lose money, partnered with a lack of knowledge around investing concepts, creates a mental barrier to entry in many people that prevents them even considering investing. This is a real tragedy for 3 reasons.
- The first reason is that bank interest rates are generally quite low. Given global inflation is around 3%, if you are holding money with a bank interest rate of less than 3%, you are actually losing money in real terms.
- The second reason is that compound interest (where profits from investing are reinvested) can build up to create quite a significant profit in the long run. More about this in the next article.
- The third reason is a less obvious but hugely important and that is managing the risk in your portfolio by spreading your money amongst a variety of products.
To take point 3 further with a common example. Supposing you are an employed 30-something with no experience of investment at all. You have recently bought a house with a mortgage worth £200k and have a small amount of savings in a bank account of <£5k. In this simplistic example, your asset portfolio is weighted 97.5% in property, 2.5% in cash. If house prices go up you will see a return on your asset portfolio, but if house prices go down you will see a loss on your asset portfolio.
Most people with assets, have already taken on risk. In the above example, this person is heavily tied to the strength of property prices. In its purest form, investing is about maximising the returns and managing the risk in an asset portfolio.
This blog is not setting itself up to be an inaccessible technical study of the financial world. Rather it will aim to holistically tie together the world of business, investing and finance and empower normal people with knowledge. Investing the time today to better understand this world should provide reward in the future.