Preparing for one’s financial future should be an important topic for everyone. There’s no shortage of reasons to invest money for the long run. Just consider these two examples:

• What do you think? How much money will you need during retirement to maintain your standard of living? It’s probably safe to say that most people would like to be financially secure in their latter years as well. However, anyone who relies exclusively on state pension benefits runs the risk of not having enough money when they are old. The so-called “pension gap” amounts to at least 20 per cent, compared to the average active income over 45 insurance years. And what about compared to the final salary? Timely investment can improve one’s financial opportunities in old age.

• From the cradle to the university, time flies indeed. Establishing a solid financial basis can help get kids through their studies without problems. Because there’s less time to study if they have to work on the side. And the list goes on and on: driving licence, living abroad, first flat, etc. The bigger the kids are, the more they need and want.

Investing as a long-term alternative to saving?

10, 20, 40 years: Knowing when you want to take certain steps in your life can have a huge impact on your investments and wealth accumulation. But are long-term financial investments even profitable nowadays? Inflation and interest rates that are low or even zero mean that money put into traditional investment vehicles (such as savings accounts, call money accounts, building society accounts) may actually lose value, rather than grow. By contrast, a carefully considered capital investment still offers the long-term opportunity of a return, while accepting the corresponding risks. With the long-term accumulation of capital in investment funds, three factors come to the fore:

Compound interest – time is on your side

In particular, so-called non-dividend funds (What kinds of funds are there?) are interesting when it comes to saving for the future. These funds do not pay out interest or dividends directly; instead, they reinvest this income in the fund assets. As a result, the net asset value automatically increases. The effect of this reinvestment principle is similar to what happens with a savings account that earns compound interest, which is an important wealth accumulation concept in the financial world. Time is a key factor in this regard. The longer this effect lasts, the stronger it is. Thus, it is important to start as early as possible when it comes to investing capital. You cannot make up for lost time. Over the long run, even small amounts can make a significant difference for investors. Please note, however, that investment funds’ yield and income vary (seeInvestment fund indicators you should know) depending on market developments. They do not guarantee fixed interest rates, and loss of capital cannot be ruled out.

The cost averaging effect with regular investment

When you make regular investments of the same amount in funds, for instance with a fund-based savings plan, you acquire more or fewer units for one contribution depending on the current price of the fund. As the contributions remain the same, you purchase more fund units when prices are low, and fewer units when prices are higher. Because more fund units are acquired when prices are low, this results in a more attractive average purchase price over the long term – though capital losses cannot be ruled out. The cost averaging effect reduces the so-called timing risk, i.e. the risk of making your investment at an unfavourable moment for entry.

Risk diversification

Investing capital with the possibility of a return is always linked to a certain degree of risk. With investment funds, however, this risk can be spread around. In the financial world, this strategy is known as diversification. It involves investing in different securities or asset classes (e.g. equities, bonds), rather than concentrating all your capital in one place. As a result, declines in one area can be mitigated or even offset by gains somewhere else. Investment funds are required to engage in risk diversification and invest in various securities as a rule. Nonetheless, loss of capital cannot be ruled out.

When is the right time to get started?

Hoping for higher interest rates or lower prices? In the end, there is no perfect time to start securing your financial future. Because it’s not about getting in and out of the market in a hurry: It’s about harnessing the market for a longer period of time. So it’s important to start early. Time and patience are more important than the specific timing.

Every investment has its own peculiarities, advantages, and risks as well. Solid advice thus forms the foundation for a long-term investment. Contact your advisor at Raiffeisen Bank Zrt. to discuss your options.