Switching from Savings to Shares: Investing in Assets that Build Wealth

Rising inflation has made it impertinent for investors to reassess their wealth-building strategies. Traditionally, savings accounts were a common choice for safeguarding earnings and growing wealth. However, the current inflationary environment renders this approach insufficient.

Traditional Savings vs Growth Potentials

Traditional savings accounts often present limited growth potential. Interest rates on these accounts tend to be lower than those offered by dividend yielding investment options. For instance, a typical savings account offers about 4.2% interest rate while investments in the capital market can offer interest rates up to 20%, depending on the type of assets, market conditions and monetary policy changes.

Earnings from a traditional savings account cannot effectively combat inflation. Inflationary pressures will erode the purchasing power of savings over time. However, on the bright side, savings accounts provide stability and accessibility to funds in case of emergencies. However, their low-yield nature hinders wealth accumulation and long-term financial goal attainment.

The Advantages of Investments Over Savings

Investments offer the potential for higher returns compared to traditional savings accounts. Unlike these accounts, investment classes such as stocks, bonds, mutual funds have historically demonstrated significant growth over time. While investments involve inherent risks, investors can diversify their portfolio to mitigate risk.

Introducing shares into a diversified investment portfolio spreads risk and enhances potential returns. By investing in various sectors, regions, and asset classes, investors can reduce the impact of poor performance in any single investment, manage volatility, and aim for more stable, long-term returns

Understanding Shares and How They Work

A share represents a unit of ownership in a company. While often used interchangeably, shares and stocks have distinct meanings. A stock is the financial instrument a company issues, and each unit of this instrument is a share. By purchasing shares, investors exchange capital for ownership in a corporation.

The shares bought can be common and preferred. Common shareholders possess voting rights and may benefit from price appreciation and dividends. Preferred shareholders typically do not have voting rights but often receive regular dividends and may have priority in asset distribution. It is important to note that while many companies issue shares, only those of publicly traded companies are listed on stock exchanges.

What are the Benefits of Investing in Shares?

Historically, stocks have outperformed savings accounts in terms of long-term returns. Reinvesting dividends from shares can significantly accelerate wealth growth through compounding.

Dividends are portions of a company’s profits distributed to shareholders. Rather than receiving cash, investors can opt to reinvest these dividends in additional shares, creating a compounding effect. This process continues as the new shares generate their own dividends, leading to exponential growth over time. It is good to note that not all companies pay dividends, but those that do typically distribute them on a regular basis (e.g., quarterly or annually).

Additional Risk Management Strategies

As mentioned earlier, investing in shares involves several risks, including market volatility, economic downturns, company-specific issues, and geopolitical events. Windfalls can make share prices fluctuate widely, and there’s always the potential for losing your initial investment. Here are additional strategies to hedge your investments:

1. Regular Monitoring: Keep an eye on your investments and market conditions to make timely adjustments.

2. Stop-Loss Orders: Use stop-loss orders to limit potential losses by automatically selling shares if they fall below a certain price.