Why Do You Invest?

October 7, 2009 by  
Filed under Investing

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?

Have you ever asked yourself that question?

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?


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Comments

12 Responses to “Why Do You Invest?”
  1. wrc1000 says:

    First, I think your blog is one of the best out there – been reading for the past six months or so.

    By the numbers:

    #1 – If by working “regular” jobs, as my wife and I do, getting “rich” is only a lottery ticket away . . .

    #2 – Our main goal: FI somewhere with a mountain view

    #3 and #5 – no kids, no plans to have any, so no worries about dependents

    #4 – already have a house with about 40% equity and 10 years left on the mortgage

    #6 – grain of salt, listen/read a lot, but going with my gut got me in 100% cash in July 2008. If still invested, I would be down 25% as of 10/09. Big question is to when to get back in.

    Keep up the good posts

  2. PJo says:

    Found your blog a week ago or so.
    No doubt, your candor and prose make for an enjoyable read.

    I invest because I have a dollar *today* that someday must become worth far more than it’s original value if I intend to avoid living in a cave, losing hard earned comforts in financial adversity, or suffering thru anticipated expenses that are forthcoming because of my life choices – having kids, ongoing traveling, college etc – at some time in the future called ‘tomorrow’.

  3. Steve says:

    We invest to leave an inheritance for our children. I guess that would fall under the category of “getting rich”. I don’t even care if they are wealthy, I just want them to have some degree of wealth.

    This has never been a reality in my wife’s family nor mine. We want to create a new “cycle of wealth”.

  4. Rick Beagle says:

    I invest for a retirement of bliss with my wife.

    As for investing to provide an inheritance for my children, I prefer to invest in their education, their moral fiber, and their sense of worth through hard work. I really am a teach them to fish kind of guy.

    Peace.
    Rick Beagle

  5. MasterPo says:

    TML – Don’t over look #1! Inspite of recent events, if all goes all (a very big “if” I grant you) in the future the stock market is still the best chance for the little guy to accumulate wealth over time. I’m sure you’re familiar with the investing success of Anne Scheiber. :-)

    Rick – So you’re leaving your kids high and dry when Obama’s health commissioner pulls the plug on you? Nice father.

    • Rick Beagle says:

      “Rick – So you’re leaving your kids high and dry when Obama’s health commissioner pulls the plug on you? Nice father.”

      Sigh. Your views kill 40,000 people a year and you are worried about my parental compassion? I think you need to mind your own house….

  6. MasterPo says:

    ROTFL!!!

    I so live it when liberals say this or that kills x-tens-of-thousands a year. I’d ask for some quantitative evidence for that but I can’t take the laughing any more.

    BTW, watch this video from Robert Reich, who is advising the President Nobel on healthcare. Talk about killing people!

    http://www.youtube.com/watch?v=IT7Y0TOBuG4&feature=player_embedded

    • Rick Beagle says:

      MasterPo.

      Quantitative data continues to be provided to you in all the pertinent posts. Please go back and look at the health care discussion rather than making me relink it only to have you ignore and request it later on.

      As to your link, what exactly is your point? He is an advisor to the President that is providing an opinion supportive of the Right. You get that right? Our Novel Prize winning President actually listens to as many sides of the issue as he can before making a decision. Quite a different approach than the Cheney puppet we had….

      Congratulations to President Obama on winning the Nobel Peace Prize. Hopefully on his way to accepting the prize he could drop off a few war criminals just to cement the deal. How about we drop off Cheney on the way?

      Peace.
      Rick Beagle

  7. MasterPo says:

    So you agree that is the REAL agenda of Obama and his administration to stick young people for the bill and pull the plug on granny??? And you don’t see anything wrong with that?!?!?!

    Of all the people I converse with on the net you sir are the only one who leaves me speechless sometimes…

    • Rick Beagle says:

      Your reading comprehension could certainly use some work. No, that is not my stance. That opinion is merely another blatant lie fostered onto the foolishly gullible (like you) by your fear mongering right winged thug friends.

      What I did say is that in his role as an advisor to President Obama (one of many mind you), this gentleman does a find job of identifying and explaining the fears of the Right. Let me see if I can give you something to which you can relate, an analogy of sorts. In the Academy Award winning movie Silence of the Lambs, the protagonist played by Jodie Foster visits the infamously nefarious psycho played memorably by Anthony Hopkins. The thinking, or so the plot goes, in order to understand and catch a really crazy bad guy, you need to talk to an expert on crazy.

      Peace.
      Rick Beagle

  8. MasterPo says:

    Then you oboviously have hearing comprehension problems. Go watch that video again.

    Reich is NOT saying it is *his* opinion.

    Reich IS saying that is the TRUTH of what healthcare “reform” is all about!!!

    • Rick Beagle says:

      “Reich is NOT saying it is *his* opinion.

      Reich IS saying that is the TRUTH of what healthcare “reform” is all about!!!”

      Oh, I see, you believe that because he claims that this is the truth that his comments aren’t his opinion? Surely, after reading your response again you are feeling… um… foolish, so let’s just let this one go.

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