Investor Intentions: They Want To

When people invest, they are putting their money to work with the expectation of generating income, profits or gains. Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains. It is important to understand the risks involved and to consider your financial goals and comfort with risk before investing.

People invest in stocks to earn higher returns and protect their wealth from inflation

People invest in stocks for a variety of reasons, but two of the most important are to earn higher returns and to protect their wealth from inflation.

Earning Higher Returns

Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains. Stocks are one of the four main asset classes that people can invest in, the others being bonds, commodities, and real estate. Stocks offer the most upside potential in the long term. While there are no guaranteed returns and individual companies may go out of business, stocks provide a higher potential for gains than more conservative investments.

Protecting Wealth from Inflation

Inflation is an economy-wide, sustained trend of increasing prices from one year to the next. It occurs when the supply of money increases relative to the level of productive output in the economy. As inflation occurs, the purchasing power of money decreases. This means that a specific amount of currency will be able to buy less than before. Therefore, it is important to invest in asset classes that can help hedge against inflation. Stocks are one such asset class. Businesses that tend to perform well during inflation are those that require little capital, such as technology and communication services companies.

Investing in mutual funds and ETFs provides easy diversification and lower risk

When people invest, they are typically looking to buy assets that increase in value over time and provide returns in the form of income payments or capital gains. Investing in mutual funds and exchange-traded funds (ETFs) is a great way to achieve this, as these funds offer instant diversification, lower risk, and reduced costs.

Instant Diversification

Mutual funds and ETFs are both types of pooled investment funds that provide instant diversification by allowing investors to buy a wide range of assets in one purchase. This diversification is important because it helps to reduce the risk associated with individual investments. By investing in a variety of assets, such as stocks, bonds, or other securities, investors can buffer losses in one area with gains in another, leading to a steadier and safer growth of their portfolio over time.

Lower Risk

The built-in diversification of mutual funds and ETFs means that they are generally considered safer investments than individual stocks. By investing in a basket of assets, the risk is mitigated, and the potential for large losses is reduced. Additionally, ETFs are considered low-risk investments because they are low-cost and often track market indexes, providing further diversification benefits.

Reduced Costs

Mutual funds and ETFs also offer reduced costs compared to investing in individual stocks. Mutual funds, for example, often have low expense ratios, and many large brokers offer no-transaction-fee funds. ETFs, on the other hand, tend to have lower management fees because they are passively managed and don't require stock analysis from the fund manager.

In summary, investing in mutual funds and ETFs provides an easy way to achieve diversification, lower risk, and reduced costs. These benefits make them an attractive option for investors looking to grow their wealth and achieve their financial goals while minimising potential losses.

Before investing, people should pay off debt, build an emergency fund, and contribute to their pension

Before investing, it is important to get your immediate finances in order. This means paying off any short-term debt, building an emergency fund, and contributing to your pension.

Paying Off Debt

The interest rate on short-term debt is usually much higher than the rate of return on investments. Credit card debt and payday loans, for example, often have double-digit interest rates. As such, it is recommended to pay off these types of debts before investing. Missing a payment can also damage your credit score, making it harder to get credit in the future.

Building an Emergency Fund

Life is unpredictable, and it is important to be prepared for unexpected expenses. Emergency funds can help cover the cost of surprise car repairs, medical bills, or periods of unemployment. Most experts recommend saving three to six months' worth of essential living expenses, though this may vary depending on individual circumstances.

Contributing to Your Pension

If you have access to a workplace pension, it is a good idea to contribute to it regularly. For most people, money invested in a workplace pension is tax-free, meaning your money will go further. Additionally, some employers will match your contributions, so it is important to contribute enough to get the maximum employer match.

People can invest in real estate directly or indirectly through REITs

People can choose to invest their money in a variety of ways, one of which is real estate. Real estate investment can be done directly or indirectly through real estate investment trusts (REITs).

Direct real estate investment involves purchasing a specific property or a stake in one, such as an apartment complex or a shopping centre. Investors make money through rental income, appreciation, and profits generated from any business activities that depend on the real estate. One of the benefits of direct real estate investment is the potential to generate substantial cash flow, as well as the ability to take advantage of numerous tax breaks to offset that income. Direct real estate investment also offers investors more control over decision-making, such as selecting properties that match their preferences for location, property type, and financing structure.

On the other hand, REITs are companies that own, operate, or finance income-producing real estate or real estate-related assets. They are modelled after mutual funds and allow individual investors to make money on real estate without the hassle of owning or managing physical properties. REITs are traded on major stock exchanges, making them easier to buy and sell than traditional real estate. They offer a low-cost way to invest in the real estate market, with a much lower entry point than direct real estate investing. Additionally, REITs offer enticing total return potential, as they are required to pay out at least 90% of their taxable income to shareholders.

REITs can be classified into three types: equity REITs, mortgage REITs, and hybrid REITs. Equity REITs own and operate income-producing real estate, such as apartments, office buildings, and warehouses. Mortgage REITs provide financing for real estate by purchasing mortgages and mortgage-backed securities, earning income from the interest on these investments. Hybrid REITs, as the name suggests, invest in a combination of income-producing real estate and real estate-backed loans.

Overall, people can choose to invest in real estate directly or indirectly through REITs, each offering its own set of benefits and drawbacks. Direct real estate investment may be suitable for those who want more control over their investments and are willing to put in the time and energy required. On the other hand, REITs are a good option for those who want to invest in real estate without the hassle of owning and managing properties, offering a more passive income stream.

Active investing aims to beat the index while passive investing advocates a more hands-off approach

When people invest, they are putting their money to work in markets. Investing is the process of buying assets that increase in value over time and provide returns in the form of income payments or capital gains.

There are two main types of investing: active and passive. Active investing aims to beat the index, while passive investing advocates a more hands-off approach.

Active investing involves frequent trading with the goal of beating average index returns. It requires a high level of market analysis and expertise to determine the best time to buy or sell investments. Active investors can use various strategies, such as hedging with options or shorting stock, to increase their odds of beating market indexes. However, these strategies can also increase costs and risks. Active investing is typically more expensive due to the research and trades involved, and it carries a higher risk of losses if investments don't pay off.

Passive investing, on the other hand, is a hands-off approach that involves buying and holding assets for the long term. It aims to duplicate the performance of major market indexes rather than trying to beat them. This strategy is often associated with purchasing shares of index funds or exchange-traded funds (ETFs) that track major indices. Passive investing generally leads to fewer transactions and lower fees. It also tends to be more tax-efficient and provides increased transparency. However, passive investing may result in smaller returns compared to active investing, especially during times of market turmoil.

Both active and passive investing have their advantages and disadvantages, and some investors choose to blend the two strategies to take advantage of the strengths of each.

Frequently asked questions