Why You Should Invest Your Money

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I inspire new possibilities to deepen love, intimacy and self-expression. I mainly write articles about that, but you'll also find refrences on design, fitness and finance. More

Surprise, surprise, you already are investing. Even if you just have your savings in cash, you're betting on those papers to have value in the future, just like any other kind of asset. Furthermore, if you have any retirement plan, that money is not just sitting there. it's being invested by someone else to grow. The vast majority of us will need income from investments when we retire, the question is if you'll settle for the minimum or take matters in your own hands.

To not need to work for money

Investing gives you a shot at income without working. It’s an alternative way to have income without selling your time. It’s the only alternative barring unlikely scenarios like marrying rich or finding buried treasure. Completely replacing the income from your job is a tall order but supplement it is very realistic. You can save up in your mattress but one sure thing in a world of much uncertainty is that cash loses a lot of value over time. To have it grow instead you need to take risk. More reward means more risk. You’re better off taking some risk because you’re already losing if you’re doing nothing.

The money machine

The goal of investing (and trading) is essentially to create a money machine. You put some money in and get out more than you put in. Your money works for you so you don’t have to. Two things determine the amount of money your machine produces:

  1. Its effectiveness at growing the money you put in.
  2. The amount of money you have to put into it.

If you have a huge amount you don’t need your machine to be very effective in order to have it produce a lot for you. If you have a lesser amount you’d need a more effective machine to produce the same amount. For example $100 in a machine with 10% effectiveness per interval will produces a profit of $10 per interval. If you only have $50 to invest you’d need an effectiveness of 20% to achieve the same rate of return.

It’s not easy

I want to highlight the importance of investing, but I want to do so in a very realistic way. I’m not selling you a get rich trick so I have no reason to paint an overly-optimistic picture. Investors and traders are regularly wrong in their predictions. I mean professional ones, let alone the amature. There’s a common term called beat the market. It means that the effectiveness of your machine or portfolio is better than if you’d just put your money in a fund that tracks the slow growth of the market as a whole. That does sound like setting the bar low but it isn’t. We know it’s possible to have big wins, we hear about it all the time. That’s the problem. It’s called confirmation bias when we only hear one side and think that it looks that way across the board. For the one who won big that time, many ore bet the other way and lost, or they were just a bit too late or a bit too early. Equally distorting is that the win is also just a moment of time in that investors career. He may have many more losses behind him or in front of him. The same applies not just to individual investors but to teams of professional fund managers. Most don’t know what they’re doing. Those that are successful are because they have an edge that others don’t have. That’s why one can argue that the best investment is in your own business where you have all the inside information.

But it is possible

What we want is consistency. Perhaps the best way to do that is to diversify. This means that instead of putting everything in one deal, you spread your investments out. That’s also why index funds are a good bet, because your placing your bet on hundreds or thousands of companies at the same time. That way, you betting on a whole that society will keep producing, which is a good bet. It’s easy to get seduced by the potential earnings and forget about the potential losses. Unfortunately you’ll likely need to get hit with some real losses before you learn to pay attention to risk management. You can diversify over asset types, different industries, different markets, different continents. The next article will explain why and how to diversify in order to always have some of your investments go up, regardless of economic climate.

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I inspire new possibilities to deepen love, intimacy and self-expression. I mainly write articles about that, but you'll also find refrences on design, fitness and finance. More

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