Why I Invest
There are many views on investing – its often portrayed as a way for the rich to get richer and control the less fortunate, some think of it as gambling, for some its a rush or a form of entertainment, and still others are just plain scared of it. The media generally doesn’t help assuage these views. In this post, I’ll share with you the foundations of why I invest. Its a good question to ask yourself – and I think the answer will help elucidate many of your underlying beliefs about money and investing in general.
I’m a big believer in ‘knowing your why‘. Having a firm grasp on why I’m doing something makes it more likely that I’ll achieve my goals – especially the longer term goals where it can become easy to get distracted or discouraged. This is especially true when it comes to investing!
An obvious first response to the question, ‘Why do I invest?’, is not surprisingly, ‘to make money!’. However, there must be a more fundamental understanding to this than simply making money – otherwise, what happens when there is a recession or economic crisis which severely impacts investment prices…. Panic? Selling at the worst moment? In such a time, it may not feel like the reason I am investing is still valid – especially if account values are below cost basis (i.e. worth less than what I paid!).
What Investing Is Not
To answer this question more fully, let’s start with what I believe investing is NOT.
- Investing is not… Gambling. Gambling can be exciting, entertaining, and it can make you rich quickly (though it probably won’t, and is likely to do the opposite!). The odds are one-sided and stacked in favor of the house. It is a highly speculative activity. Gambling is also, generally speaking, a zero-sum game. Wealth is not created by gambling, merely transferred from one entity to another.
Certainly, investing can be approached similar to gambling – but that isn’t how I believe it should be approached! Nor do I believe that is the fundamental nature of ‘the market’. Investing done right is essentially the opposite of all these traits of gambling. It should be boring, slow, and disciplined. Rather than being a zero-sum exchange, it allows us to participate in the wealth creation which results from economic productivity and advancements driven by innovation and ingenuity.
- Investing is not…. Risk free. There is no such thing as a ‘free lunch’ when it comes to investing. I believe investment risk and reward are inseparably correlated (and, notably, not all risk is created equal!) – higher risk should correlate to a higher expected return, lower risk should correlate to a lower expected return. And low risk and high return don’t go together. If someone tells me an investment is guaranteed or ‘a high return for almost no risk’, I run!
- Investing is not…. Optional for most people. What I mean by this is that, without the remarkably powerful effects of compounding over a long period of time, it would be extremely difficult for me to save the amount of money required to reach and sustain financial independence (that point where I am no longer dependent on my labor to generate income sufficient to cover my cost of living).
Foundations of My Investment Beliefs
Here are the ‘foundations’ of my investment beliefs. This is what provides me the grit and discipline to stay committed when times are tough (and there will be periods of pain with investing!). It goes beyond simply ‘making money’. Rather, it extends to a deep appreciation for the nature of capital markets and economics, math, and public access at a global level to mankind’s ingenuity.
- I believe humans are innately driven to create, produce, and innovate… to solve problems and become increasingly more efficient. In a single word, we possess ‘ingenuity’. History has shown that humanity generally holds innovation to be one of its highest callings – and public markets provide all of us (who are willing and able) an opportunity to benefit from this.
- Capital markets which operate efficiently and are available to the general public are highly desirable because they allow us to participate in the resulting wealth creation of mankind’s ingenuity (not merely a re-allocation of resources, as with gambling).
- Compounding has been called ‘the eighth wonder of the world’. It has the power, over long periods of time, to generate significant results for those who engage markets with discipline, patience, and a long term horizon.
Why I Invest
There is a lot of noise out there – people selling fear, telling us ‘this time is different’, or even the occasional headline of ‘equities are dead’. This noise can make it difficult at times to remember WHY I invest. Of course, I put my hard earned money at risk so that it can have the chance to grow into more money on its own. But fundamentally, its because I believe humans are going to continue to innovate and ‘the market’ allows me to participate in the resulting wealth creation. I don’t believe the economy is zero-sum – rather, wealth is actually created through innovation and productivity.
If that were not the case, then investing really is more akin to gambling and, at best, I’d just hope to be in the right opportunity at the right time (and at the expense of someone else!) – much more nerve-wracking, and hard to feel good about!
Instead, when I invest in a globally diversified fashion, I believe I get to own a small piece of mankind’s total ingenuity – and I’m excited about where that ingenuity will take us. Sure, our species has some dark spots (too many of them), and we’ve ‘innovated’ some pretty horrific things. But I try not to lose sight of the fact that there is a long trend of progress. I think we’ll keep doing what we’ve been doing for millennia (hopefully with less fighting) and continue making improvements to our daily life. For that I am grateful, and willing to wait out the downsides of the economic cycle in pursuit of the long term trend of wealth creation.