(Updated on 2021/01/24)
- Concerns about investing
- The COVID-19 situation
- What you need to start investing
Hi there, Kinkajuu here.
Today I’d like to talk about why it’s so important to invest your savings.
Before I started investing, I had a lot of different concerns. I’d heard that there are many risks, that it’s difficult to pick winning funds, that there’s no guarantee of making money, and so on. I did some research, and I wasn’t sure if a typical return of 5-7% would be good or bad.
Further, my parents advised against investing.
In their opinion, savings should be kept in bank accounts because there is no risk of losing money. I had heard that investments were risky, but I wondered if my parents’ opinion was correct. I googled many pages about investing, attended three financial seminars, and read more than ten books and magazines about finance. It was a difficult journey, but I started to get a good understanding of investing.
I came to understand that investing is actually less risky than keeping money in a bank account because money in savings accounts in fact ARE risky – they lose value to inflation over time.
Inflation is the phenomenon where currency becomes less valuable over time. For example, something you could buy for \100,000 on Jan 2021 might be sold for \100,010 on Jan 2022. The product itself didn’t change in value, but the Japanese Yen itself is less valuable, so you need more money to buy the same thing – in this example, 0.01% more.
Going back to the point about bank accounts being risky, major banks in Japan generally pay an annual interest rate around 0.001%. If you deposit \100,000, you will get \1 in interest after a year. This is less than the inflation rate of 0.01% in the previous example; you would need another \9 to buy the same item.
Generally, inflation is positive and it’s higher than the interest on bank accounts. As a result of inflation, the cost of goods also goes up over time. Therefore, in order to be able to afford the same goods from year to year, your savings need to be earning more interest than the inflation rate – something bank savings accounts can’t do.
When I realized that fact, I immediately started investing in iDeCo and Tsumitate NISA accounts.
The stock market this year is a great example of why my parents were right – and wrong – about the stock market being risky. Due to the global pandemic, many financial indexes like the Nikkei and S&P500 dropped as much as 33% in 2020. Obviously a bank savings account would have been much safer to keep money it.
But, as quickly as the stock market can fall, it can also recover. After dropping 33%, the stock market recovered all of its losses in 2020 and then added even more value on top of that. The S&P500 actually gained 16% in 2020 despite the pandemic!
So, my parents were right that stocks can be risky, but in the long term they will generally earn (much more) interest than a bank account.
To get started investing, you will need some seed money accurate financial information and an account to invest in.
First of all, you don’t need to force yourself to invest if you don’t have enough money to do it. It’s more important to secure your financial situation through savings so that you can invest later when you have more money.
If you have enough money to invest (say, 10-20% of your salary), I recommend checking this post about how to create investment accounts and how to get accurate information.
Finally, If I can share one piece of advice, it is to always keep up with the newest information. Information changes quickly, including investing systems and rules. Keeping up to date is the best way to protect yourself.
I hope these posts will help as you start to invest and select funds.