Investing: Why Should You Do It?
In recent times, people have been hearing that keeping money in banks might actually lead to losses. Why is such a statement being made? Due to the ongoing COVID-19 situation, central banks of major countries have once again lowered their benchmark interest rates. As a result, the global low-interest-rate environment is expected to persist. Benchmark interest rates directly affect bank savings interest rates. Although money kept in banks earns minimal interest, the cost of living rises rapidly over time. Consequently, the actual value of money decreases. The difference between what you could buy with a thousand won ten years ago and what you can buy with a thousand won now illustrates this phenomenon.
Due to these reasons, putting money in a bank during times of low interest rates is not an attractive option. Instead, investing in financial products that can generate greater value than the rate of inflation is essential. While investing carries a certain level of risk, diversifying investments can help mitigate these risks. The saying "Don't put all your eggs in one basket" emphasizes the importance of diversification. Now that we've explored the reasons for needing to invest, let's examine three investment principles that are worth knowing before starting.
Investment Principle 1: Cultivate Patience and Maintain a Steady Pace
It's a common practice to buy when assets are cheap and sell when they're expensive. Timing the market is referred to as "market timing." However, accurately predicting market timing is challenging even for investment experts. What's more important than timing is the consistency of investing. Especially during volatile periods in the stock market, maintaining your investments becomes even more critical.
Historically, rapid declines and rises have often occurred in stock markets over short periods. While fluctuations are present in most financial markets in the short term, the graph below illustrates that steady long-term growth is typically sustained. Investors who stay invested during these periods of fluctuations tend to benefit the most from this long-term upward trend.
Though the likelihood might be slim, the advantage of investing over longer periods becomes evident: the longer you invest, the more favorable your returns tend to be. While past performance doesn't guarantee future results, staying invested can be seen as a way to maximize your participation in market upswings.
Investment Principle 2: Consistently Invest Even Small Amounts
Not investing due to timing concerns is akin to forfeiting potential long-term gains. Let's take stocks as an example. According to our analysis, investing a small amount consistently over time was the most rational approach. This technique, known as dollar cost averaging, involves investing in the market steadily over a period, thus reducing the average cost per investment. Consider investing 100,000 won each month over five months. As stock prices change daily, the amount of stock you can buy with 100,000 won will vary each month.
Although this month you might buy 10 shares with 100,000 won, next month you might buy 15 shares due to a decrease in stock prices. And the following month, due to an increase in stock prices, you might only buy 8 shares. Nevertheless, consistently investing even a small amount can help lower your average investment cost. This technique capitalizes on the magic of compounding by reinvesting returns, providing significant benefits.
Investment Principle 3: Market Fluctuations Are Normal
During the course of investing, factors like political events, economic performance, changes in corporate activities, and natural disasters can make markets unpredictable, leading to sudden rises or falls in financial markets or securities prices. These unpredictable shifts are termed volatility. While volatility triggers anxiety, it's an inherent aspect of the investment process and should be considered "normal." When investors embrace volatility as an inevitable part of investing, they are better equipped to respond rationally when it occurs.
For investors prepared for volatility, sudden changes in the market become less unsettling. This mindset enables investors to be more rational and focused on their long-term investment objectives. In the following discussions, we will explore various ways to prepare for volatility.
So, are you ready to invest?
[ Investment Terminology Bookmark ]
- Market Timing: Predicting the optimal investment timing by forecasting market highs and lows.
- Dollar Cost Averaging: A strategy where an individual invests a fixed amount of money at regular intervals, resulting in a lower average investment cost.
- Volatility: The extent of unexpected rises or falls in financial markets or securities prices.