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October 2, 2022
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How to plan long-term investments? –

Even a relatively small amount of capital can provide you with a good life in retirement, provided you start investing early enough and keep increasing your profits systematically. When planning a long-term investment, you profit from the very beginning: you can choose safer solutions and effectively multiply the final amount by obtaining “interest on interest”.

Compound interest, or the eighth wonder of the world

Albert Einstein, founder of the theory of relativity, is a character who can be inspiring in many ways. Hardly anyone, however, links the famous physicist with the world of finance. Meanwhile, he drew attention to a basic mechanism that should always be kept in mind when planning long-term investments: compound interest, called by Einstein “the eighth wonder of the world” and “the most powerful mathematical discovery in history.” This is a method of accruing interest that causes interest to be added to your starting principal and also multiplied in the next billing period, and the total amount grows exponentially. This means that over time, “interest on interest” works on our profits, like a snowball.

Although – especially with smaller investment amounts – initially the differences between compound and ordinary interest may be almost imperceptible, in the long term it translates into huge profits. Assuming that you invest PLN 10,000 and earn 5% profit every year, then with a compound interest after 10 years, you already have PLN 16,288, instead of PLN 15,000 with ordinary interest. All you have to do is keep increasing the interest, without even paying any additional amount.
Unfortunately, it works the same way “the other way”, so if we have any debts, especially loans and payday loans with high interest rates, we should pay them back in the first place, otherwise the interest may grow to an exorbitant amount.

Diversification, or what else to invest your money in, if not in cryptocurrencies?

The second principle that we should keep in mind when creating an investment portfolio with a long-term perspective is diversification. Simply put, it means that we should never put all our eggs in one basket – that is, never invest all our resources in just one solution. Of course, users of the portal focus their attention to a large extent on cryptocurrencies. It is understandable: people who 10 years ago decided to invest even a small amount in Bitcoin and kept it for a long time, today can congratulate themselves on this decision. It is enough to look at the historical data: 22.05. In 2010, the first transaction with BTC took place: 10,000 BTC (equivalent to $ 30) was paid for two pizzas. In 2013, the exchange rate of 1 BTC already exceeded $ 1,000, and today (02/02/2021) it is already around $ 34,700.

Nevertheless, large fluctuations in cryptocurrency rates, strong periodic declines, stock market collapses and hacker attacks make it worth thinking about investing some funds differently, for example in shares or precious metals. Thanks to this, you limit the risk and in case of failure you will not lose everything.

Funds can be an interesting choice from the point of view of portfolio diversification ETF (Exchange Traded Funds), i.e. index funds that can be a good alternative to investing in stocks yourself. Their goal is not to maximize profit in a short period of time, but to faithfully reproduce the selected index or indicator, e.g. the American S&P 500. In this way, we do not buy shares of one specific company, but invest in the entire index, which allows us to profit from the development of various industries and the entire economy. Of course, this is still associated with risk, but ETFs are considered (especially in the long term) to be a much safer solution than investing in stocks yourself. At the same time, index funds are managed in an algorithmic manner, which means that they are associated with much lower costs than traditional, “ordinary” funds.

Can I afford not to invest?

Of course, everyone must arrange the optimal investment portfolio for themselves, taking into account their own financial capabilities, resistance to stress, knowledge and the planned investment horizon. Remember that time is money: the sooner you start, the more money you can make over the years. In the future, this may be of fundamental importance: the forecasts of future pensions presented by ZUS do not give rise to optimism, so it is worth starting to think about securing additional income. Unfortunately, many people believe that they earn too little to be able to afford to invest, and sometimes even save money for rainy days. In reality, however, we should ask ourselves the opposite question: can I afford not to invest? Finding the necessary funds in many cases does not have to be difficult, all you need is financial discipline and consistency in changing your habits: for example, putting aside a small sum every day, even the equivalent of a pack of cigarettes.

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