I thought today I would answer the bigger question of why a person would want to invest in stocks? To make money is simply not good enough. You can make money with a savings account right?
Here are some of the reasons you would want to invest:
- To beat inflation. Inflation causes your cash to depreciate, becoming less valuable.
- To achieve compound growth: making money off your money, then making money off of that money. A snowball effect.
- To be ready for a big goal, such as retirement.
- Because you may not have social security, or it may be reduced
- For a way to make money for yourself besides your primary job
- To teach yourself new skills
- For the enjoyment of picking great stocks
Invest to Beat Inflation
Inflation is the general rise of prices in the economy. It makes your money, i.e. dollars, less valuable. See Inflation, Explained on Vox.
Our biggest recent inflation rate was in 2011, at 3.11% for the year. See Statista article. That means to beat inflation, you need to earn more than 3.11% each year. Or you can just subtract 3.11% off of your interest, dividend, or growth rate.
Since it is currently hard to get a 2% interest rate savings account or pretty much any kind of savings vehicle, your inflation adjusted growth is less than zero. That means you are losing money by keeping money in a savings account. No matter what. However, the money there is the safest it can be.
Similarly, you would be hard pressed to beat inflation with a Treasury note or bond. Treasuries, think savings bond, are issued by the U.S. Government to cover its debt. They are the safest non-insured investment you can buy, but their inflation-adjusted rates are negative.
Invest for Compound Growth
What is compound growth? Let us say that you put $1000 in a savings account that earns 10% per year. At the end of year 1, you now have $1100 as the account earned $100. You leave the $1100 in the account. At the end of year 2, you now have $1210. You earned $10 more than you had earned at the end of year 1. Why? Compound interest. You earned interest on your interest. Pretty soon these steps add up into real money. For instance, say you do the same thing for 10 years… you now have $2593. That is 2.5 times your original amount.
Generally, the same is true for growth. Growth is what we call stocks that appreciate in value. Growth will also compound over time, giving you compound growth. Let’s say that instead of earning 10%, your average return is 30% (which is possible). At the end of 10 years, your $1000 becomes $13785.
Invest To Be Ready For Retirement
As you can see, investing can produce some big amounts of money over time. Amounts that can help you fund your retirement. When you are ready for retirement, you convert a good portion of your stock holdings to fixed investments. Then you can draw the interest to provide you with income to pay your bills and take vacations with, or whatever you would do in retirement.
Invest Because You May Not Have Social Security
Will social security be there for you or won’t it be? Good question. It is possible that the government could do something to fund Social Security for a longer period than it currently has, or they could do nothing with it. That would mean that benefits would be reduced or eliminated. Willing to take the chance? Investing means that you will have a retirement income independent of Social Security.
Invest To Make Money From Your Money
Investing allows you to take your money and make money from it. In other words, it’s money that you didn’t make at your job. Eventually the money you earn will be enough to support you, either at retirement or even in advance of retirement. Some people have retired in their 30’s from their savings and investments. Just make sure to start early!
Invest To Learn New Skills
When you invest for yourself, you learn new skills. You learn how to pick and value a company. You learn how to view significant market gains and market losses. You learn not to get freaked out when you “lose money” (i.e. market loss). You learn financial analysis of a company.
Ok, in my opinion, focus investing is a little boring. It should be. It doesn’t take up tons of your time so it’s really not like a second job. It is a little bit of research and a little bit of planning, but you do learn things along the way that you can use in your life outside of investing.
Invest To Pick Great Companies
There is a bit of enjoyment that comes along with picking a great company and having it do wonderfully over a few years. In the short time I have been investing in individual stocks I have seen some double and triple in value. Others have not done as well. Either way it is kind of fun to see my monthly progress.
Why Do Focus Investing?
So ultimately, why do you want to do focus investing?
Simple, because it is your way to beat the market. Not that you will, but you can. If you pick good companies.
You are your best broker. You can pick 10 stocks to invest in by considering what’s important. Financials of a company are especially important. Just pick great companies at good prices.
The best you can hope to do with an ETF or mutual fund is to match the S&P (or other stock index) gains and losses. Now there are leveraged ETFs that could possibly do it, but you could also lose all of your money with them.
Now you could just buy stock in Berkshire Hathaway, which is managed by Warren Buffett. They might do better than the S&P, they might not. Why? Because they are severely limited to what they can invest in. You are not. You can pick a small company before it explodes upwards. You can invest what you have in FAANG stocks. You can mix strategies. Berkshire can only invest in large companies at this point.
Good luck to you, let me know what you think about all this in the comments.
- Compound Growth: Definition and Formula – Study.com
- What are the FAANG Stocks? – Fox Business
- Why Invest In Stocks? – Morningstar
- Warren Buffett – Wikipedia