Why Do You Invest?
Now that the markets are showing signs of life, the pundits and financial writers are pumping out investing articles of all kinds. Gold is prominently mentioned as are a wide variety of stocks, mutual funds, and exotic ETFs. More so than ever, when I read these articles I ask myself this question: Why should I invest in that? Or taken one step further, the question becomes: Why do I invest?
The first two questions many investors ask in an uncertain economy are:
Is this the right time to invest?
What should I be buying?
These are important questions to be sure. But knowing exactly why you invest can be more important because it can direct you to a better understanding of how you should invest.
So why do we invest? Let’s consider the possibilities.
1. I invest to become rich or wealthy. I used to think this way. Now I realize that becoming wealthy is not really a goal unto itself. It is more of a means to an end. The more appropriate question is: Why do want to be rich or wealthy?Let’s continue with that in mind.
2. I invest for retirement or financial independence. This one makes the most sense. Investing done right may get you to a point where working to earn money is optional. Some call this retirement. I call it financial independence. If you think about it, this reason for investing may require substantially different investing strategies compared to the more generic “to become rich or wealthy.”
Investing for retirement calls for investments that will provide a secure retirement income that is inflation protected. Investing to become “rich” may require taking on more risk. These strategies are not 100% compatible. An investment failure at becoming wealthy is not so bad if you have a secure retirement income. An investing failure at securing a retirement income can mean working at Walmart when you are 75.
3. I invest to help put our kids through college. This is another excellent reason to invest but is unique unto itself. First, it has a more specific investing time horizon. Second, investments must be selected for an appropriate level of risk that decreases as the kids approach college age. Third, this reason should not take priority over retirement investing.
4. I invest to buy a house. Note that I don’t include a house as an investment category by itself. A house is not really an investment except as a means to provide shelter services. That means for a present or future retiree, a house is a tax-free income provider. With that in mind, if you are saving for a down payment, your investing time horizon is probably very short and your risk level should be low.
If you already own a house, this reason for investing remains if you still have a mortgage. Your “investing” strategy may be to accelerate the mortgage pay-off.
5. I invest to create an inheritance. For most people, investing to leave something for the kids should be a low priority or non-existent reason. This is as it should be. First, you have to make sure that your investing (or lack of same) will not cause you to become a financial burden on your family. (See reason #2 above.) Only after you have done that should you be concerned with what might be left over.
6. I invest because everyone tells me I should. I think there is a lot of this going around. The financial planners and other participants in the retail investing industry bombard us with investing propaganda. Some of it is worthwhile. A lot of it is not. We must understand that most of the investing messages we hear or read are designed to serve the interests of the messenger, not us. When considering what we are told, we should take a breath and look for information that is properly aligned with our true reasons for investing. Case in point: Many so-called “target retirement” mutual funds have been proven by recent events to be not suitable for retirement investing.
So readers, do you agree with Mr. ToughMoneyLove that truly knowing why we invest is an important question, perhaps the most important?
Why do you invest?