How Investing Works

Investing gives your money the potential to grow and work toward your future goals. While it’s more complex than simply putting a portion of your paycheck into a savings account, every saver has the ability to become an investor. By following three key principles, you can build a strong foundation for investing.

What Is Investing?

Investing is a strategy for increasing the value of your money over time. It involves purchasing investments with the goal of selling them later at a higher price than what you originally paid.

Saving vs. Investing: Key Differences

• Saving typically involves placing money in a bank account or keeping it in a secure place. Investing, on the other hand, means purchasing assets and keeping them in an investment account.

• Growth potential is generally limited with savings, as traditional bank accounts often offer low interest rates. Investing, however, can help your money grow and keep up with inflation through earnings.

• Time horizon differs: saving is usually for short- or medium-term goals, while investing is better suited for long-term objectives such as retirement.

Three Essential Investing Rules

If you’re thinking, “I’d love to grow my money—where do I start?” these three rules can help guide your investing journey.

1. Start Investing as Early as Possible
   The sooner you begin, the more time your money has to grow. Even if you start with a small amount, investing early allows you to take advantage of compounding returns.
2. Stay Invested for the Long Term
   By remaining invested and avoiding frequent buying and selling, you allow your money to build upon itself. This process—known as compounding—enables you to earn returns on both your initial investment and the earnings it generates over time.
3. Diversify to Reduce Risk
   Putting all your money into a single investment can be risky. If that investment declines in value, you may face significant losses. Instead, spreading your money across multiple investments helps balance risk—when one investment underperforms, gains in others can offset potential losses.

The Power of Starting Early and Staying Invested

One of the most effective investment strategies is to begin as early as possible and stay invested for the long run. Even if you can only invest a small amount now, it can grow significantly over time due to compounding.

Compounding occurs when earnings—whether from capital gains or interest—are reinvested, generating even more earnings. The longer you stay invested, the greater the potential impact of compounding on your wealth.

Managing Risk Through Diversification

All investments come with some level of risk, but there are strategies to manage it effectively.

Key Risk-Management Strategies

• Diversification: Spreading your money across different types of investments helps reduce the impact of any single asset losing value.

• Asset Allocation: Dividing your portfolio among different asset categories—such as stocks, bonds, and cash—can help balance risk and reward.

One simple way to diversify is by investing in unit trust funds and exchange-traded funds (ETFs). These investment vehicles hold a variety of assets, making them inherently more diversified than investing in a single stock.

Start Investing Today

Investing doesn’t have to wait—you can begin whenever you’re ready. Over time, it can help preserve and increase your money’s purchasing power, contributing to financial security in retirement.