Why Do You Invest?

October 16th, 2014 by John Murphy

The answer to that question for many people is: I invest in order to make money. On the surface that might seem to be the most obvious and simple answer. But is it? The real answer is a little more complicated than that.

Making money is what we do in our chosen career. If you are a lawyer, doctor, mechanic, school teacher, or enjoy some other career path, that is how you make money. Additionally, some people try to make money by investing their life savings into real estate or possibly a start-up company. Statistics show that one in five new companies succeeds while all the others fail. Likewise, if someone invests in real estate at a bad time in the market cycle, they could wait decades to get their money back–if at all. Is that really what most of us have in mind when thinking about investing?

These types of investments can produce wealth, but it’s very risky to take your life savings and jeopardize it in such a gamble. The chances of success are far outweighed by the chances of failure.

Establish an investing goal
Before jumping into risky or unproven opportunities, you should establish a proper investment goal. For most of us that goal is: I invest to put away money for retirement. For others the goal might be: I’m investing for my child’s education, or to leave something for my grandchildren or my favorite charity. With a reasonable and tangible goal in mind, investors rightfully expect a positive return on their investment. They are saving, and need positive returns to try and keep the purchasing power of their savings from being eroded by inflation.

To put it in simple terms, savvy investors would like to be able to purchase at least the same amount of goods and services thirty years from now as they can purchase today. To do that they need to keep their investments properly diversified in quality companies, and they should invest in high quality fixed income instruments to achieve a more predictable return. They can control their risk, or volatility, by balancing between their “growth money” and their “safe money” using asset allocation and discipline.

Real investing requires discipline
In exercising good discipline over asset allocation, you need not stress so much about retirement savings. Goals need to be clear. We must spend less than we make. Most importantly, we must stick to our goals, and save over a long period of time to achieve what we set out to achieve. There are no shortcuts for most of us given the risks we must manage. We invest to make sure one day we can retire with the money we have saved. We cannot afford to make bets, because we may not have the time to recover when things go wrong.