Is It Worth It?: The Risks of Investing and Not Investing

Investing can be quite intimidating when you hear it from someone’s mouth. As a student, you may opt to avoid these kinds of topics since it might come off as complicated, confusing, and only for those with a huge amount of money to spare. These impressions might be true in the past but investing in this day and age is relatively easier at the dawn of many investing platforms available in the market. Hence, everyone, especially college students with limited capital and time at their disposal, are given the chance to invest in a matter of minutes.

Investing in a Nutshell

According to Picardo (2021), investing is the act of allocating resources, generally money, with the goal of creating an income. You can invest in ventures, such as utilizing the money to establish a business, or assets, such as buying real estate with the intention of reselling it at a greater price later. In simple terms, investing is an opportunity to make your money grow. People earn from investment through periodic interest or dividend payments that are set within the guidelines of purchasing the products. An alternative way of profiting is through capital appreciation which is characterized by an increase in the value and price of an investment.

In investing, risks and returns go side by side. Different types of investment products have varied risks and returns. Nonetheless, a safe guiding principle is that the lower the risks, the lower the expected profit that you should expect from it. In contrast, the higher the risks you accept, the possibility of higher gain should be anticipated.

Recommended Investments for Students

Constrained by your limited allowance and tight schedule in juggling school work and other activities, college students might lose hope in finding an investment that is appropriate to their set-up.

Nonetheless, several investment opportunities are available that are low-maintenance, and manageable but still promise a reasonable profit. It must be noted that different investment opportunities come with different types of risk that must be considered before investing, which will be discussed later on.

Bonds — A bond is a financial instrument that allows an investor to lend money to a borrower, such as a corporation or the government. Investors are promised a fixed income periodically depending on their agreement on the instrument.

• Reason: Low-risk

Stocks — Stocks are a type of security that offers investors a portion of a company’s ownership. Stocks are sometimes known as “equities.” People profit from it through dividend revenue and market fluctuations.

• Reason: Greatest potential in the long run.

Mutual Funds — These are investments that pool money from a number of individuals in order to invest in stocks, bonds, and other assets. Mutual Funds are managed by experts and owned by a group of investors.

• Reason: Undemanding

Cryptocurrency — Cryptocurrencies are digital assets that individuals invest in and use to make purchases online. You trade actual money for “coins” or “tokens” of a particular cryptocurrency. People generally earn through capital appreciation.

• Reasons: Availability and Accessibility

What Platforms to Use in Investing?

Bonds.PH is one of the most trusted mobile financial applications in the Philippines where investors can acquire treasury bills hassle-free in just a few clicks. GCash is also a mobile wallet application that will enable users to purchase units of mutual funds and bonds with minimal requirements.

Alternatively, COL Financial is a beginner-friendly website where you can trade stocks and purchase mutual funds as you are supplemented with useful and relevant information for your investments. As proof of its commitment that investing is for all, they do not require requirements such as Tax Identification Number for those who want to give it a try. Lastly, PDAX, Binance, and eToro are a few of the crypto trading platforms with the best features and utility for investors.

Surely, you have some doubts and worries in your mind if this is really worth it. It is still your decision if you want to invest or not but to help you be more informed, here are some of the risks of investing in the aforementioned investment ventures.

RISKS OF INVESTING

Bonds

The most basic risk with regards to bonds is Interest Rate. There is an inverse relationship between the bond prices and the prevailing interest rate. If the bonds pay higher interest than the one in the market, the investors would be attracted to buy this even at a higher cost. However, when market interest rates start to rise, investors will quickly dump this investment which in turn forces the price of the bond to go down. As a holder of the bond, a rising interest rate will make your investment tradable at a lower price than what you expect to receive from it.

Another major risk is Inflation Risk. When you invest in a bond, you have been promised to receive a fixed amount of money (principal) on a due date. Nonetheless, with the rising prices of goods and commodities in the market, the money that you lend to the company will just stay as is and will lose value over time. Your one peso today is not equivalent to your peso yesterday. Investing in bonds means carrying the risk of losing the value of the money you invest by the time to receive the principal.

Investors must also realize that the promise of gain and money back is not a hundred percent guarantee since it depends on the capability of the company to pay its obligation. If ever the company files for bankruptcy, you might lose a lot of money since they won’t be able to repay the full amount that they owe you.

Stocks

Investing in stocks means rooting and believing for the chosen company to do well in the succeeding proceeds. Therefore, it depends on their businesses’ performance for the investing period. This risk is known as a business risk. It may happen due to several reasons like a change in trends, increased competition, government regulation, and obsolescence. For example, given that you invest in Jollibee, and their profits decreased significantly because of the rise of Popeye’s Restaurant, there is a possibility of a decrease in dividends. This will also sway the market sentiment to pull out of their own investment in Jollibee, causing stock prices to drop.

Government and legislative rulings are also major risks for corporations and businesses. They are regulated by different laws and organizations that control the quality of the products or services that they do. If ever they will be constrained or reprimanded by the authority, their operations will cease or be limited. Given that, your investment in the company will depend on the existing state of the industry laws and regulations.

Stories in the media, be it factual or hoax, can also make your investments decrease. Headlines that can make the company appear in a bad light will make other investors and stakeholders wary of the stocks which will affect the value of stocks directly and indirectly.

Mutual Funds

The most fundamental risk associated with mutual funds is called Market Risk. It is the general price fluctuations of the investments that you availed. It may be due to a recession, political instability, natural disasters, and other circumstances that affect the financial market as a whole. For example, you bought a unit of a Technology Feeder Fund in GCash. Then, there is news about a hacking incident that targets different tech companies. Due to this news, people started selling various technological investments that made the value of their own investments decrease significantly.

Since Mutual Funds are directed by a fund manager, the earnings are not guaranteed since it depends on the expertise, knowledge, and investment techniques of the one who manages the account. Continuous wrong decisions made by the manager can lead to the fund’s downfall.

Currency risk is also a possibility. If ever you pool your money on a fund from overseas, a decrease in the exchange rate will also affect the value of your investment. For example, as the US dollar becomes weaker, so do your investments in the same currency.

Cryptocurrency

The main peril connected with trading and investing in crypto is its high volatility. With a large number of traders analyzing and studying the trend, it is prone to changes all throughout the day. It might happen that the few thousand pesos that you invested will just be worth a few pesos overnight. Therefore, you must be alert and aware at all times.

The reason for its accessibility and convenience is that it is unregulated by the government and a bank, unlike the previous examples. This is two sides of the same coin since this limited to no intervention may prove to be a disadvantage in some cases in which it would be easier if there is a controller.

As it is primarily virtual, it is prone to technical glitches and also hacking. There are several real-life cases of fraud and scams that happened while transacting in the crypto world. It is also susceptible to human error as one wrong element can make your investment disappear into the void or to someone else’s wallet with no hope of recovery.

RISKS OF NOT INVESTING

1. Inflation Will Make Your Money Lose Value Over Time

Inflation is the gradual decrease of a currency’s purchasing power (Fernando, 2022). Over time, the prices of goods and services on the market increase. You might remember how your parents told you stories about how cheap everything was during their time compared to today. This all happens because of inflation.

Imagine letting all your money sit in a bank with a very low interest rate, or worse, putting it inside a box. The amount of goods and services that your money can buy decreases over time. The value of your money today is not the same as the value of your money tomorrow. This concept is called the time value of money.

For a better visualization of inflation, let us use Ace Subido’s Philippine Inflation Calculator to compare what 1,000 pesos can buy in 2010 vs 2020. According to the calculator, the goods and services you can buy for 1,000 pesos in 2010 would cost you around 1,384.59 pesos in 2020 based on inflation rates from 2010 to 2020. This is a 38.46% increase in 10 years.

2. Missing the Chance to Grow Money Through Compounding

Compounding is the process of adding interest to an existing principal amount plus previously paid interest where interest returns increase over time, sometimes called the “miracle of compounding” (Chen, 2022). In general, the earlier you start to invest, the greater the effect of compounding on your investment, assuming your investment generates interest returns at regular intervals.

To better understand how compounding works, let us illustrate an example using SEC’s compound interest calculator. Say you invested 100,000 pesos into an investment that generates an interest rate of 10% annually. Holding this investment for 10 years will give you a return of around 260,000 pesos. However, if you hold it for 20 years, you will have a return on investment of about 673,000 pesos! That is more than double the return for holding it double the time. This also means that if you had invested 10 years earlier, you would have 159% more money!

3. Being Ignorant in the Economy and Financial Markets

Fundamental analysis is one of the most important skills you will learn to develop once you start investing. This will help you determine the value of a stock you want to invest in and evaluate your options. With knowledge of skills and terminologies such as this, you can become more confident that you will always be prepared for different economic situations such as a recession.

The COVID-19 pandemic caused many people to lose their jobs and other sources of income. While this is an uncontrollable and an unexpected situation, financially literate individuals who had emergency funds and diversified investments may be more “recession-proof.”

4. Spending Your Money All at Once

When you have cash on hand, you may be tempted to splurge on things you want. Worse, you can even go into debt if you spend more than you earn. Saving and investing regularly can make you more disciplined financially and can give you peace of mind knowing that you have cash for other purposes such as emergencies.

Simply allocating a certain amount for your needs, wants, savings, and investments can go a long way towards achieving your financial goals. One popular method of budgeting is the 50–30–20 rule where you allocate 50% to your needs, 30% to your wants, and 20% to savings and investments.

5. Saying Goodbye to Your Financial Goals and Dreams

Different people have different financial goals. Some want to be crazy rich, while others simply want financial freedom. Unless your goal is to lose the value of your money and work harder for more, you may want to consider investing.

Imagine living the lifestyle you have always dreamed of. Chances are you will get there easier and faster if you choose to invest and let your money grow. As you have learned from the concept of compounding and the time value of money, the best time to invest is now. It is never too late to start investing.

CONCLUSION

Now that we have given you the downside of both options, the final decision is in your hands. It is your responsibility to compare which you deem more important.

The good news is that when you decide to invest, you can minimize risk through different risk management techniques.

Different people have different risk capacities. You may be a young student who can tolerate higher risks for higher potential returns, or you may be a breadwinner who wants to ensure a secure investment with stable returns. It doesn’t matter how high or low your risk capacity is, there are different types of investments that may suit you. It is a misconception that investing is only for people who can take big risks and lose all of their money. In general, the higher the risk, the higher the potential returns on your investment.

Instant gratification, such as splurging every payday, can only give you temporary satisfaction. Delayed gratification on the other hand, can give you long-term fulfillment.

In the end, the main purpose of investing is to achieve financial freedom. As Mark Zuckerberg once said, “The biggest risk is not taking any risk. In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”

Reference List

Chen, J. (2022, April 20). Learn about compounding. Investopedia. Retrieved May 30, 2022, from https://www.investopedia.com/terms/c/compounding.asp#:~:text=Compounding%20is%20the%20process%20whereby,called%20%E2%80%9Cmiracle%20of%20compounding.%E2%80%9D

Fernando, J. (2022, May 13). What is inflation? Investopedia. Retrieved May 30, 2022, from https://www.investopedia.com/terms/i/inflation.asp#:~:text=Inflation%20is%20the%20decline%20of,over%20some%20period%20of%20time

Picardo, E. (2022, February 8). What is investing? Investopedia. Retrieved May 30, 2022, from https://www.investopedia.com/terms/i/investing.asp

Ramsey Solutions. (2022, April 18). What is cryptocurrency and should I invest in it? Ramsey Solutions. Retrieved May 30, 2022, from https://www.ramseysolutions.com/retirement/investing-in-cryptocurrency#:~:text=Cryptocurrencies%20are%20digital%20assets%20people,with%20a%20trusted%20financial%20pro

Subido, A. (n.d.). Philippine inflation calculator. Retrieved May 30, 2022, from https://acesubido.net/ph-inflation-calculator/

U.S. Securities and Exchange Commission. (n.d.). Compound interest calculator. Compound Interest Calculator | Investor.gov. Retrieved May 30, 2022, from https://www.investor.gov/financial-tools-calculators/calculators/compound-interest-calculator

U.S. Securities and Exchange Commission. (n.d.). Stocks. Stocks | Investor.gov. Retrieved May 30, 2022, from https://www.investor.gov/introduction-investing/investing-basics/investment-products/stocks