Before investing

Investing your savings is important: if you don't, not only do you miss the opportunity to build up your savings, but also risk inflation reducing their value over time.

Decisions about the future are always made under conditions of uncertainty. When you invest your savings to get a return, you must be willing to take on some risk, even if that risk is sometimes so low it may seem non-existent.

Investing may seem complicated, but a small investment in knowledge can become a valuable ally in protecting your savings from inflation and helping them grow over time.

Return: what it is and how to measure it

The return is the profit you make by investing your money.

It comes from interest, dividends, and capital gains or losses.

1. Interest. If you buy bonds, you're lending your money to the company or government that issued them in exchange for periodic interest payments. If you make a deposit, you're lending money to a bank, which in turn pays you interest.
   

   Example

   If you buy a bond with a face value of €1,000 and a 5 er cent coupon, you will receive €50 in interest each year.

   When we talk about interest, a key concept to understand is compound interest or return. Compound interest is the accumulation of interest on interest: by reinvesting your returns, your capital grows much faster over time, especially in the long run.

   Example

   Imagine investing €1,000 at an interest rate of 5 per cent. After the first year, you'll have €1,050. If you reinvest everything, including the €50 you earned, the next year the 5 per cent will be calculated on €1,050, not the original €1,000. So, after the second year, your capital will grow to €1,102.50 instead of just €1,100. What seems like a negligible difference in one year can compound over time and significantly increase your savings.

2. Dividends. When you buy shares in a company, you become a part owner of its capital. If the company generates profits, it may decide to distribute part of them to shareholders as dividends.
3. Capital gains and losses. These are the differences between the selling (or between the redemption) price and the purchase (or the subscription) price of a financial instrument. For example, if you buy shares and then sell them when the company is doing very well, you may be able to sell them at a higher price than what you paid. For shares, capital gains are often the most important component of the return.

Risk: what dangers do you face when investing in financial markets?

We are never guaranteed the returns we hope for: they are always more or less uncertain. The prices of stocks and bonds may rise or fall, dividends are not guaranteed, interest payments and capital repayments may vanish if the issuer defaults, and unexpected inflation can reduce the real value of your investments.

For this reason, in investing, every return is accompanied by some risk. In finance, there is no such thing as easy money.

One of the most common measures of financial risk is volatility, which we can define as the degree to which returns fluctuate from their average. Let's consider two investments, A and B. Investment A increases by 2 per cent one day and decreases by 1 per cent the next. Investment B increases by 5 per cent one day and drops by 4 per cent the next. In this example, Investment A is less risky because its value fluctuates less.

To invest in a riskier asset, investors usually require a higher return. This is why higher returns always come with higher risks, and vice versa, if you want to reduce your risk, you'll have to accept lower returns.

If you choose to invest in riskier assets, you must be prepared to endure temporary declines in value and, in the worst-case scenarios, significant losses.

Some investments, such as short-term government bonds and savings deposits, carry such low risk that they are considered risk-free, but they also offer lower returns. Others, like shares, can be much more profitable – but also far riskier.i.

Time

Time is one of the most important factors in investing. The longer you keep your investments, the more compound interest works in your favor, increasing their value. Also, your investment strategy can vary depending on your investment "time horizon", which is the period you are willing to keep your money invested before using it.

Typically, we talk about:

• short-term, for an investment period of less than one or two years. In this case, a larger portion of your portfolio should be in low-risk, low-return assets such as short-term bonds or savings deposits;
• medium-term, for an investment period between one/two and five/ten years. If your time horizon is a few years, time can be your ally, allowing you to take on more risk and aim for higher returns. You might consider allocating a greater share of your portfolio to riskier assets, such as shares and medium- and long-term bonds;
• long-term, for an investment period longer than five/ten years. If you plan to invest over many years, the portion of your portfolio invested in assets like shares can be higher.

Watch out for costs

Costs, particularly those of managed savings products such as investment funds and insurance policies, can significantly reduce your investment returns.

Choosing lower-cost products is already a form of gain.

Buying and selling financial instruments such as stocks and bonds involves fees that vary depending on the bank or intermediary. Always read the product information sheets carefully before purchasing!

Some complex investment products, like mutual funds, ETFs, or certain types of insurance policies, must be accompanied by a KID (Key Information Document), a pre-trade simplified prospectus summarizing the product's main features, including expected costs.

Costs shown before subscribing or purchasing financial products don't always match the actual costs incurred. You can check the real costs through the Costs and Charges Report (or MiFID Report) that your bank must provide at least once a year. Compare the costs of different products before investing, and review the actual costs afterward.

Beware of behavioral traps

Even the best plans can be undermined by emotions. Many people make mistakes because they are influenced by loss aversion when markets fall or by euphoria when they see a chance for quick profits. These are examples of behavioral traps. A good financial advisor can help you avoid these mistakes, but you can also make better decisions on your own by being aware of the psychological pitfalls we all tend to fall into.

Values

Your personal values may also influence your investment decisions. For example, you might want to support your country by investing in funds dedicated to Italian companies such as PIRs (Individual Long-Term Savings Plans), or support environmentally conscious projects by purchasing green bonds, or choose to invest only in companies that meet ESG (Environmental, Social, and Governance) criteria.