Investing Basics: What Is Investing?

By Christina Kilroy

October 31, 2019

This month, the ICI Education Foundation celebrates 30 years of developing, delivering, and promoting investor education. As part of our yearlong celebration, we will be sharing an ICI Viewpoints post each month that explains a basic concept of investing, drawn from the ICI Education Foundation’s Investing Road Trip.

What Is Investing?

Investing has never been easier, cheaper, or more prevalent, with more than half of US households reporting that they own stock, either directly or through mutual funds or retirement savings accounts, such as a 401(k) or individual retirement account (IRA).

Reach of Stock Ownership Has Dramatically Expanded in the United States
Stock ownership, millions of US households

Note: Stock ownership includes directly held shares as well as stocks held indirectly through mutual funds, ETFs, closed-end funds, and other managed accounts; inside and outside of retirement accounts.

Source: Investment Company Institute tabulations of the Federal Reserve Board Survey of Consumer Finances

You may often hear the concepts of saving and investing used almost synonymously—“I’m saving for retirement through a mutual fund.” While investing can be a way to save for an important financial goal, they’re not the same.

It’s Different Than Plain-Vanilla Saving

Merriam-Webster defines to save as “to put aside as a store or reserve.” To invest is “to commit money in order to earn a financial return.” Investing means putting your money to work for you by buying assets that you think will increase in value over time. The money you gain from investing is called your return.

Here’s another way to think about investing. When you earn money through a job, your ability to earn income is limited by the hours that you can work. Assets that you’ve invested don’t need to sleep or eat or watch Netflix—they can work for you around the clock.

Your Money Works for You

Now imagine that you work, but you also invest some of the money that you earn—say, $100 each month. If you earn a return of 7 percent per year on your investment and reinvest your returns, your investment would grow as illustrated by the darker blue line below.

Growth of Investment with Compound Returns
$100 contribution per month with return of 7 percent per year

The gains are modest at first—for the first few years, returns add little to the total value of the investment. But as returns continue to compound over 40 years of investing, the total value of the investment reaches $240,000, and returns make up 80 percent of that.

In this example, setting money aside regularly—the saving—adds up to $48,000. But the impressive increase over time? That’s the benefit of investing.

Investing involves making informed decisions about how to make your money work for you, and how to balance the risks and rewards that come from these decisions. As you can see from the dark blue line in the graph above, the rewards can be great!

Next in this series, we’ll look at the potential downside of investing—risk—and some of the different types of risks investors face.

Christina Kilroy is vice president of the ICI Education Foundation.

Permalink: https://www.ici.org/viewpoints/19_view_icief1

TOPICS: 401(k)Exchange-Traded Funds IRA Investment Education Mutual Fund Savings Shareholder

Five Key Points on 401(k) Plan Fees from ICI Research

By James Duvall and Steven Bass

October 23, 2019

Thanks to innovation and a competitive market, 401(k) mutual fund fees keep falling. ICI has a window into this information through our study of the cost of providing 401(k)s, in which we take a close look at the expenses and fees of mutual funds incurred by 401(k) plan investors, and in related research on fund fees through a collaborative research effort between ICI and BrightScope.

The ETF Rule: Paving the Way for Further Growth and Success

By Jane Heinrichs

October 10, 2019

For tens of millions of Americans, mutual funds and exchange-traded funds (ETFs) are the most convenient, cost-effective, transparent, and well-regulated tools available to meet their important financial goals. Both investment vehicles are governed by the Investment Company Act of 1940, but ETFs have long needed their own set of uniform regulations under the Act.

The SEC rightly recognized this by recently adopting Rule 6c-11—otherwise known as “the ETF rule.” The SEC’s rule is the next step in the evolution of ETFs and will foster greater transparency, innovation, and competition, enabling more investors to realize their benefits.

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