What is Investing and Why it Matters?
Investing is using a resource (time, money, energy) with the expectation of achieving a future benefit or gain. When you invest money, you are spending money to own an asset. With the goal of generating income, growing value, or both. The power of investing is allowing the power of compound interest, dividends, and appreciation to grow money.
The Plan
Investing is a plan to grow money. This plan involves setting a SMART goal, determining risk, and creating a portfolio. When you set a SMART goal, you are defining your WHY. This can be to retire early at 40, to buy your dream house, to build generational wealth, or anything else you desire. By defining your WHY, you are investing with a purpose and have a timeframe.
Because investing involves risks, that timeframe should be at least 3 years out. You have to know your true risk tolerance. Can you stomach losing 50% and not panic sell? In 2020, many sold when the market dropped by 30% and missed its recovery. Knowing your true risk tolerance will help you stay disciplined and stick to the plan. Even though the goal is to grow money, you shouldn’t lose sleep and stress out.
Your goal, risk tolerance, and investing style help determine your portfolio. The goal and risk tolerance will determine the type of assets and their allocation in your portfolio. Based on your investment style, you can choose to manage your portfolio yourself with index funds and/or individual stocks. Or have it managed by a portfolio manager (robot or human).
The Future
Why bother investing? Why risk money? Investing is working today to secure your future. Is your future worth securing? Is your future worth taking a risk for?
Inflation eats away at your future. Reducing the value of cash at an average of 3% a year. So your income and money need to be increasing by 3% a year to maintain their value in the future. In October 2021, inflation hit 6.2%, the highest since December 1990.
The average return of the stock market over 30 years from 1991 to 2020 was 10.7%. So you have to invest to outpace inflation and secure your future. Through investing, you can grow your money for the future. By mastering investing, you can build generational wealth.
Work
In life, you have two options: work for money or have money work for you. Most do the former by investing time for a paycheck. Then turn around and give that paycheck back to employers with little kept for ourselves. With investing, you pay yourself first and go from consumer to investor. Investing is about starting where you are, with what you have to get to where you want to be. Quit working hard for money and have money work for you.
Tip
Start investing what you can to secure your future