Why Invest?

 Why Invest?

Sometimes, people ask me: Why invest?

Well, I thought of a great answer, and I wanted to write it down so I don’t forget. Now, I can just send those folks a link to this page :) And hopefully, other people can benefit from these answers!

As explained below, the answer to this question is: I’d rather die with money than live without it.

     What if you lose all your money?

I won’t. Here’s why:

Through a low-cost total US stock index fund, I hold a piece of over 3000 companies headquartered in the United States. Unless all 3000+ companies fail—almost simultaneously—I won’t lose all my money.

And through a low-cost international stock index fund, I hold a piece of almost 6000 companies headquartered outside the United States. Unless all 6000+ companies fail—almost simultaneously—I won’t lose all my money.

I also hold a low-cost total bond index fund, through which I’ve essentially made loans to the United States government, some state and local governments, and numerous companies. Unless they all decide to stop paying their bills—all at once—I won’t lose all my money.

I also have a position in real estate, through a low-cost real estate investment trust, or REIT. Unless everyone—including businesses like grocery stores and office buildings—stop paying their rent, I won’t lose all my money.

I also hold cash and CDs in multiple different banks and credit unions. Unless all of it gets stolen, I won’t lose all my money. And there’s FDIC deposit insurance to secure these, anyway!

The market certainly can drop. And, indeed, it does just that. Routinely! But I spent years on research, and my eyes were wide open to that fact before I ever put a dime into the market.

That’s exactly why I’m exposed to so many different asset classes: bad things can and will happen to me. But if disaster hits all of these different assets at once, I have much bigger worries than retirement…

     What if you die before you retire and you don’t get to enjoy it?

That question assumes that happiness comes from spending money.

It doesn’t.

Now if I were to die early, that’s beyond my control. But at least I’ll have money to leave to family members or charitable causes. It’s better to build some wealth now, even if I’m not the one that gets to spend it.

And, really, what’s the alternative? To spend all my money now, and then get old and frail—with no money left? And without the ability to work and earn more?

Here’s the bottom line: I’d rather die with money than live without it.

     But how do you know you’ll have money? How do you know stocks will go up?

I don’t.

Neither does anybody else.

But I can, and do, learn from what happened in the past. I’m especially grateful to learn from other people’s mistakes, so I don’t have to learn the hard way.

People make one of two main mistakes regarding their money:

1) insufficient savings

2) a lack of prudence

Number 1) is pretty self-explanatory: people don’t save enough. This is, by far, the most common mistake.

Number 2) is even more dangerous, but fortunately, less common. Number 2) happens when people get some knowledge, but not the wisdom to go along with it.

For example, it is possible to trade stocks, bonds, etc. ‘on margin.’ That means you’ve borrowed money, which needs to be repaid with interest, for the express purpose of investing that money you’ve just borrowed.

After all, if you can earn 10% a year, on average, with a stock market index fund but you’re only paying 6% a year in interest, that’s 4% profit per year! And you’re earning that 4% profit on money that isn’t even yours!

Hopefully you see the problem in this line of thinking. If not, I’ll make it clear.

For maybe 80 percent of the time, this approach could work out fine, especially if you have some savings in the bank to cover the amount of the loan. (But if you have savings, you don’t really need to buy stocks on margin, do you?…)

But, of course, the issue is the other 20 percent of the time.

Suppose you take this loan, buy a stock fund, and after a few months, the market plunges. And when I say ‘plunges,’ I mean that it drops fast and hard, for a long time. Think 2008, in the Great Recession. Or 2020, when most of the world got shut down for COVID. The graphs show the market making a beeline for the basement.

When this drop reaches a certain level, the brokerage will automatically issue a “margin call”—meaning that you have to repay the loan. And no pleading, yelling, or hiding will stop the margin call.

So you will be forced to sell your stock while it is down, in order to meet the margin call. And this tends to happen when the economy is generally suffering, so your employer may ‘downsize’ you (or, if you run a small business, your sales may slump). So you will be legally obligated to repay that loan at exactly the worst possible time!

It’s better to be broke than to make mistake number 2), which will leave you broke and ruined.

So, to answer the original question: how do I know that stocks will go up?

I don’t. It’s impossible to know what the future holds.

But I have examined data from the past. I’ve looked not only at the history of the United States, but at other countries as well. And indeed, they have a long history of a general upward trend in the stock market, and for perfectly logical reasons.

On the small chance that the market stays down for the next 30 years, or that it disappears completely and all my money is lost? Well, I sure won’t be happy about it, but I’ll survive. I’ll adapt. And I’ll continue to live below my means, whatever they may be.

I lived below my very modest means when I was in grad school, and I continue to live below my means today. So that means I’ll avoid mistake number 1). And I think I’ve already demonstrated a pretty prudent approach to investing, which means I’m likely to avoid mistake number 2).

     Won’t Social Security take care of me?

Probably. Despite the occasional doomsaying on the evening news, it’s likely that SS will still be there, even if the current problems don’t get fixed before the 2030s.

But as a matter of principle, I try not to count on other people, or on an inheritance, or on the government, or on anybody else. They may help me out, but for whatever reason, they may not. It’s better not to depend on help that may or may not come.

So, why invest?

Because I can’t afford not to.