Many would say that investing is the key to wealth and financial freedom. Despite its potential, investing alone offers no guarantee on the path of financial security. While strategic investments can grow your wealth with time, there are several reasons why it will take a significant amount of time before you see your returns.
Over Estimating Average Returns
New investors normally get into the practice and expect high returns within a short amount of time. In truth, the returns will not lead to massive wealth quickly unless the initial capital investment was a substantial amount. Compounding interest will promise returns over decades, but it does not change the fact that it would take a significant amount of time for results.
According to wealthify your investments will double in value around the 10 year mark. But of course that also depends on many other factors which will be highlighted in this article further. A good practice is to reduce risks by thoroughly researching your investments and making smart informed decisions.
Market Volatility
Another reason why investing won’t grant you immediate returns is due to inherent market volatility. Recessions and generally bad economic conditions could possibly result in significant loss of investments. This could be a temporary or permanent effect, depending on the market conditions.
This also means that any new investor will need a strong long-term investment strategy that incorporates patience, discipline and an open mind to withstand low or even negative returns. There is also inflation that needs to be considered. The perceived value is never going to be same as the actual value over time and that might affect your average returns.
Not diversifying and understanding investments
By not having a well-diversified portfolio, investors normally carry bigger risks with their investments. According to Investopedia, a portfolio of 25 to 30 stocks will have investors at the most cost-effective level of risk reduction. Diversification protects investors from unsystematic risks.
With a diversified portfolio you will also need to understand the many timeframes that comes with them. A strong mix of low risk and high risk is optimal. Low risk investments are normally small in their return while high risk ones have higher volatility but yield a much higher return in the long run.
Most new investors make the error of making investments based on tips. Regardless of its source, no matter how knowledgeable it seems, do not follow the tip blindly! Do your own analysis on the investment and research its associated risks and inherent value to your own portfolio.
Should you even invest?
Th simple answer is ‘yes’ as it is an important tool in building wealth. However you will need to think of it as a piece of a larger puzzle toward financial security. This puzzle should include a healthy income base, proper financial management and multiple income streams.
“Rome was not built in a day” and wealth building is just as time-consuming. There is no real quick and easy single-solution road, and you will need to find the right balance when approaching investing to yield the best results.