What is an investment, and why should you invest?
Updated: May 4, 2022
“It’s good to invest your money” seems to be a quite trendy sentence these days. It could also be “invest, invest or the bank will take the rest” (but I made that up…).
Well - before you follow the advice, let’s try and figure out what an investment is. So grab a coffee, or whatever rocks your system, and let's get started!
What is an investment?
When you want to invest your money, you are essentially putting them into something that you think will give you a better return or profit, later on:
This can be buying stocks/shares in a company
Buying an old bike, restoring it, and selling it for profit
Taking an education or course, which will elevate you economically
Buying an apartment for renting out
Buying cryp… NO. Sorry. That’s speculation.
Going to the casi.. NO. Sorry. That’s gambling.
Okay okay. Investment. Speculation. Gambling. I think we already need some clarification.
When you invest in something, usually, you do your homework, or you make sure that someone else did their homework. For example if you buy into an investment fund (a company that hires professional people to invest in other companies), you really make sure that they know what they are doing. You check their results over time.
Also, usually, depending on the investment, you have patience.
If you buy old bikes for restoration and selling, then I guess you know about bikes. You find it interesting, and you know how to fix them and how to price them.
When you speculate in something, you are basically lacking knowledge and therefore hope that it will give you a return/profit OR the risk is higher than the gain you seek, but if you win, you win big. You can speculate that Bitcoin will go to $100.000.000 (or whatever random YouTube guys fantasize about). But who really knows, right?
Is buying stocks also speculation? If you don’t know what you are doing, and you buy a stock because your uncle told you so, then yes.
Can you make money on speculation? Certainly. Can you lose money? Very much so.
Gambling. Well. You leave your return or profit completely up to chance.
Don’t get me wrong here, there’s nothing wrong with speculation (I’m no fan of gambling, sorry), but it doesn’t qualify as “investment”.
Now we got that out of the way. Aaahh...To the next topic!
Why should you invest?
When your best friend (or your parents) tell you “it’s good to invest your money”, you should know why you are doing it. Otherwise it loses purpose really fast.
This is obviously very personal. Some people want to invest their money to have more freedom later on, some people are doing it for their pension, some for their kids, some for pleasure, some for the money, some because they want to retire early, some because they value sustainability or know of a specific company they want to support. Og så videre (Danish for “et cetera”).
It kind of comes down to this; having more freedom for yourself and loved ones, later on. I get it. It sounds a bit cliché. You can also be more free, because you move to the countryside and just live more inexpensively; whatever works for YOU. BUT, doing something with the excess money you have (small or large amount), is just smarter. Doing nothing will do you no good, not now, not later.
Of course, you need to find a good reason for yourself. But I would like to give you some thought to it by sharing why I am doing it, and how it helps me and my fiancé.
Why do I invest?
I have three main reasons:
The first one is that I feel more safe doing it (what?!). Yes I know, it involves risk. Think about this; if I leave my money in my bank account, they are guaranteed to lose value (because of inflation, which by the way is going up). Plus there are negative rents now in Denmark, but that doesn’t hurt as much. On the other hand if I invest them, I know that over time (10+ years), they are worth more. The risk is that I sell them, because I get nervous when they fall.
Some perspective: The last time the financial markets went down hard was in the beginning of 2020 (C-19). It took under a year to fully recover (most markets even less). Before that we need to go back to the financial crisis, where the markets bottomed in 2009. 4-5 years later? Back on track.
Additional perspective: In the last 100 years, it took the S&P500 (USA’s largest stock index) ~3.3 years to get to where it was after larger falls (+25%), on average. The longest period being the Great Depression (1929), which took 8 years. So in reality it’s more safe to invest, than it is to do nothing, if you are patient and do it for the long term. The picture all the way in the top shows this very well. It’s a graph of the American stock market from 1870 to 2020. Up, up, up.
The second one is that I have more freedom to do what I want. It’s the only reason why me and my fiancé can safely quit our jobs, go to Romania for 3 months (her home country), come back to our house in Denmark, and hopefully start making money on our businesses. Of course we can’t just chill, but we can both start something we are passionate about, and if it takes longer than expected we can start to sell some of our investments.
It’s a back-up of sorts, and it makes it safer to do something a bit crazy, knowing that we have the option to sell some of it, if needed.
The third one is that we will have more money later on, for coming kids and down the road, pension. Yes, pension. As boooring as it may sound. Let’s get serious for a moment: My generation is set to live for 85+ years (I’m 31). If we stay healthy, we might make it to 90. If we go on pension at 65, we need to have enough money for 25 years of old-peoples-life (playing petanque, cards, visit grandkids, whatever).
Let’s say we need 25.000 DKK (that’s 2700 Euro) every month to live in this expensive country called Denmark. Over 25 years that adds up to 7,5 million DKK, or 1 million Euro!!. Of course we will likely have a house we can sell, and we have pension from work and government, but still. It’s a lot of money.
Additionally, it also serves as a “oh shit”-savings account, just with good interest. If something happens to either me or my fiancé (god forbid), at least we then have back-up money. Or maybe one of us gets fired down the road, when we have 3 kids. You never know.
“But Martin, I’m afraid that the market will completely collapse”. One thing is certain; it will, but we already talked about that it will regain its strength again. How you best dance with the market, I cover in the article "How to dance with the markets"
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