30 March 2021

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It is essential to invest from an early age

Author: Luigi Campopiano

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Understanding the importance of investing in your own savings from an early age will help you reach financial independence. Here you can look at six steps to become a better investor for your financial freedom: 

1. Compounding interest, the best ally;

2. Inflation (how to lose money if they are cash);

3. Investing machine (leave the money to work for us);

4. Psychology and time;

5. Asset classes;

6. Investment strategy.

When we invest, our savings move on an asset or an asset portfolio which give us a return thanks to:

• Appreciation over time;

• Interests; 

• Both.

These are the most essential asset class:

• Equities;

• Fixed Income;

• Commodities;

• Real Estate;

• Funds/mutual funds;

• Exchange-Traded Funds “ETF”;

• Derivatives (Futures, Options, etc.);

• Angel Investing, Venture Capital, Private Equity, Private Debt, etc.

Investing in your saving is fundamental to limit the “opportunity cost.” When we have understood the asset classes, we need to distribute our savings thinking about opportunity cost: we need to understand the relationship between risk and return of the asset classes. For example, investing in stock has better returns and more risks than investing in bonds: if the stock return is 6% and bond return is 2%, our opportunity cost will be 4% (we are not thinking about risk). Leaving our savings on a bank account or investing in bad asset classes will cause an increase in opportunity cost. Here an example. Luigi has 10.000$ to invest, and he has different options:

1. Leaving his savings on a bank account at 2% (annual return: 200$);

2. Investing in stocks at 6% (annual return 600$).

In this case, the opportunity cost is 4%: leaving the money on his bank account, Luigi misses 400$ of potential returns. Furthermore, Luigi is ignoring other fundamental factors:

• In the last years, inflation was relatively low but is always a risk;

• Leaving savings on a bank account as cash cannot allow Luigi to benefit from compounding interest, what Albert Einstein called “The Eighth Wonder of the World.”