Why investing is a good idea

Take the first step

You are on your way home from a night out and the nearest shawarma bar is luring with its irresistible smells. But you resist the temptation and eat a couple of cheese sandwiches when you get home. If you skip a spontaneous fast food meal or a couple of beers once a month and instead invest the around DKK 100 you have saved, you can end up with a huge return when you retire from the labour market. This effect is called compound interest and is very important to understand when it comes to savings and investment,” says Anders Storm, an asset manager at Lån & Spar.

“If you pay DKK 100 into your pension savings each month from the age of 20 until the age of 70, you’ll have saved up DKK 60,000. This money double over a period of 50 years. If you can save DKK 800 each month, you’ll end up with DKK 1,000,000,” says Anders Storm.

He stresses that the calculation is based on how the global stock market has performed in the past many years, with both economic ups and downs. Or in other words:

“It’s based on historical returns. We can be statistically certain that it will increase,” says Anders Storm.

But even if you don’t invest your money in shares or through your pension savings, and instead just deposit your money in a bank account, you can still benefit from compound interest.

What is compound interest?

Even small amounts will grow over time because of the compound interest effect, which roughly speaking means that interest is added to existing interest and will increase exponentially over time. This is a key concept within investment and savings.

Most banks offer positive interest rates on your current account. As a member of IDA, you can get a 5% positive interest rate on your current account, for example. If you can save up DKK 200,000 on your current account, and if you leave the money there for 20 years, at an interest rate of 5%, using the formula A=P×(1+r)n, the calculation will look as follows:

• A is the final amount including compound interest
• P is the original amount (in your case DKK 200,000)
• r is the interest rate per period (5% or 0.05 as decimal number)
• n is the number of periods (in your case 20 years)

So: A=200,000×(1.05)20 A= DKK 530,670

You will have more than doubled your original amount of DKK 200,000 in twenty years.

Many reasons why investing is a good idea

Even though banks and brilliant minds within economy often mention retirement as an important driving force for investing, remember that there may be many reasons for wanting to start investing.

Perhaps you already know that you want to be able to work fewer hours WITHOUT having to cut your salary. Children may come into the picture and you want to spend a little more time with them in the first couple of years. Perhaps you want to embark on a business venture abroad and need capital to keep your dream alive without having to take out expensive loans. There may be many types of motivation.

If you can save up and invest in a broad range of shares, you can withdraw some money from the snowball effect of compound interest and use it to supplement your salary or make your dream holiday a reality.

Long-term investment advice

Start early: The sooner you start investing, the more time your money has to grow with compound interest.

Diversify your portfolio: Spread your investments across different assets such as shares, bonds and properties to reduce the risk.

Patience is key: Long-term investment requires patience. Stick to your strategy and avoid impulsive reactions to short-term market fluctuations.

Understand your risk profile: Consider how much risk are you willing to take and adjust your portfolio accordingly.

Keep an eye on the costs: Lower costs mean a higher return for you. Go for investment opportunities with low fees and costs.

Focus on long-term value: Do not let short-term fluctuations distract you. Focus on long-term, stable growth.

Think of your finances as a chest of drawers

Before you venture into investing it is a good idea to have a healthy financial base, so you are not “forced” to withdraw your investments when unforeseen expenses occur. According to Anders Storm, you can think of your finances as a chest of three drawers.

Start by filling the top drawer, where you deposit money into an account for unforeseen expenses. This can be a visit to the dentist, a new bike or a spontaneous holiday with friends. This is money you can spend here and now, and the amount depends on your consumption.

The second drawer is a larger savings account with a time frame of up to three years. Perhaps you want to save up for a car, a deposit on a flat or a down payment on a cooperative flat. The amount can be between DKK 100,000 and DKK 200,000.

When you have filled the top two drawers, you can begin to invest in the stock market in the bottom third drawer. The time horizon here extends beyond three years. This is money you can do without, and which can slowly increase over time.

Putting money in the top drawers first requires discipline, because you typically already receive an employer-paid pension from your company,” says Anders Storm.

How should I invest?

You can invest your money in several ways, and it very much depends on your “risk profile”, as it is called in the world of investment. If you have low risk tolerance, it is best to use a so-called unit trust through your bank or through other players. This could be Nordnet, where you have control over your own investments. A unit trust spreads the money invested over a broad range of shares, thereby minimising the risk of losing large sums of money.

On the other hand, if you have a high-risk profile, you can talk to your bank adviser and invest more narrowly in fewer and more risky shares. This can make the return higher, but you also risk that some shares will fall drastically.
For example, if you had invested all your money in Novo Nordisk years ago, you would have a huge return today. But no one knows what the future holds if competitors of Novo Nordisk make a better and cheaper weight-loss drug, for example.

Not surprisingly, Anders Storm recommends that you invest through your bank to avoid spending too many hours in front of your screen monitoring the ups and downs of various shares. This may lead to a short-term strategy, which is subject to a much higher risk than long-term investment.

“Some clients start by investing half themselves, and then they use us as active asset managers in the investment. But ultimately we usually do it all when clients discover that they can’t beat the market anyway,” says Anders Storm.

When Anders Storm refers to “the market” he means the total increase in the global stock market over time. This is a curve that moves up and down at intervals. The stock market is said to increase by 7-10% annually, including economic crises and pandemics. This is why it’s important to have a long-term perspective to obtain a return on your investments, and not sell your shares in haste when the market goes down. Because historically, the market will go up again. As a rule of thumb, do not touch your investments for at least 3 years and preferably even longer.

Of course, there may be changes in your life that have a great influence on how much money you can invest each month. Perhaps your roomie moves out and all of a sudden you have to pay all of the rent yourself, or you may want to work fewer hours and therefore your salary will decrease. In such situations, it’s important that you talk to a friend and an investment adviser. A friend knows you and what kind of person you are. An adviser can guide you to invest in way that suits you best.

“You should know that the plan you’ve made probably won’t last, so you’ll be needing advice many times as life changes,” says Anders Storm.