An investment is a money or other assets spent on something you hope to profit from. Typically, these investments are made to provide income or growth. Investments can come in money, stocks, bonds, property, and even time. The money invested is referred to as capital. It is a common misconception that the term ‘investment’ relates only to the money a person puts in, for example, when buying shares, but it also includes money put into property, stocks, and bonds. Typically, it would help if you were careful about the terms of your investment.
- Time and Money
Time is the most important factor in investments. Time influences how you give your money and therefore affects the success of that investment. For example, if you invest a lot of time into studying your potential career options but fail to gain employment. As a result, you will have made a poor investment of your time. Trying to balance how much time you are willing to spend on getting an education (i.e., studying and receiving qualifications) and how much time you should spend earning money to support yourself gives a true insight into what type of investments are likely to be successful for you.
The more effort you need to put in for a given return, the less time-efficient it will be, which also means that it is not a good investment in your time. Similarly, if you are only prepared to settle for low returns on your investment, you will need to spend a lot of time finding the right opportunity. Also, if you are not prepared to wait for your investment to mature before you start due to your lack of patience, this could be considered a poor investment.
- Management and Regulation
Investments are managed by investment managers, sometimes called fund managers, who try to find profitable opportunities which they believe can be profitably invested. They take advantage of the knowledge and resources available to buy or sell shares and property and aim to create a win-win situation for the manager and investors.
Once an investment is held, there is a risk that it will fall in value. For example, if your investment loses money, it could result in you being short of cash or losing money. Managing an asset involves deciding whether you should put more money into it to increase your return or sell it off so as not to lose any additional cash.
- Life Expectancy
The average time an investment is likely to last before it runs out is referred to as its life expectancy. This is because you can calculate the length of time that an investment will last by multiplying the years (or decades) it has been placed in for by the inflation rate over that period. For example, if you invest £10,000 for 21 years at an inflation rate of 4%, your investments are likely to have a life expectancy of around 22 years.
The length of time you can expect an investment to last is important when choosing the right asset for you. You should estimate the earnings or return you will receive from the investment and compare this with the amount you would have spent on that investment. A growing number of people are choosing to invest in property instead of other investments because the property is considered a safer asset. This is because there is a greater chance of recuperating your original investment than from shares, bonds, or other investments, as it can take up to 30-50 years to reach their full value.
Investments can provide you with a regular income from interest, dividends, or capital growth. Dividends are income from shares in a company being paid to investors. For example, if you buy a £100 stake in a company and the company makes an annual profit of £10, you would receive £10. Similarly, if the company made a yearly loss of £10, you would lose money on that investment.
Capital growth is the increase in value of an investment over time and is often quoted as how much it has increased over time (e.g., 10% per year). Then, the next year, you would receive £110 and continue to receive this income. The increased value of your investment is referred to as capital growth. Capital growth is the only income investors can receive from savings accounts.
The total return is how much you earn from your investment over time. It includes any income, dividends, or capital gain you have received over that period minus any tax on that return. For example, if you bought a share for £10, which gave you returns of £5, and then sold it for £15 after one year, then your total return would be £5+£15=£20. The total return can be calculated by taking the total amount of money you have made (e.g., £20) and subtracting the amount you paid for the investment (e.g., £10). You can see that you have made a profit of £15.
The total return is one of the most important factors in determining the overall success of an investment, so it is important to be aware of returns that are higher than expected, as this could be misleading. For example, if a share had returned £20 and then rose to £90 over the next year, but were still providing only returns of £5 per year, then this would be misleading as you would have made more money from investing £10 in a second share. This means you would need to pay even more for your next investment if you wish to continue making similar returns.
Liquidity refers to how easily your investment can be turned into cash and used whenever you want it. Some assets are more liquid than others, so you will need to consider the amount of money you can afford to lose and the time frame you would need to access this money without losing out on important opportunities. You will also need to consider whether there is a risk involved in accessing your investments if they are less liquid. The most liquid assets are shares, government bonds, and bank deposits.
Certain types of investments are less liquid than others; for example, an investment with a low-interest rate or illiquid could be used as a haven from financial turmoil but could also be a very poor investment. For example, when house prices rose rapidly in the UK between 1997 and 2006, this pushed many people into investing in property. Still, many more people would have been better off investing in stock markets instead, as they were less likely to fall away in the event of a financial crisis.
To be successful, investment requires a long-term financial strategy. Investing in short-term goals will give you inconsistent results with some wins and losses. Focusing on your overall financial goals, such as buying a house, going on holiday every year, or retiring, is better. It is also important to remember that even when investing for the long term, risk should always be addressed. It is still essential to keep an eye on important economic events, such as elections and interest rate decisions.