Recently, I’ve been thinking about investing.
“What’s so special about that?” you’re probably wondering. After all, I am a financial advisor, so it’s my job to think about investing. But lately, my thoughts have taken on a slight twist. “Why do we invest at all?” is the question I’ve been pondering. It’s a question all investors should be asking themselves.
Generally speaking, there are two broad reasons why people invest their hard-earned money. The first reason is simply because they want more of it. Some people want as much money as possible, and they figure investing is the best way to get it.
The second reason is because you have a specific goal you’d like to reach, and you know you won’t be able to achieve it without investing. Your goal could be anything: retirement, travel, funding a child’s education, you name it. Investing, then, is simply a means to achieve your ends.
So which reason is best? To answer that question, let’s see what the great Aesop had to say by looking at two of his most famous fables. First up: The Goose with the Golden Eggs.
One day, a countryman going to the nest of his goose found there an egg all yellow and glittering. When he took it up it was as heavy as lead and he was going to throw it away, because he thought a trick had been played upon him. But he soon found to his delight that it was an egg of pure gold. Every morning the same thing occurred, and he soon became rich by selling his eggs. As he grew rich he grew greedy, and thinking to get at once all the gold the Goose could give, he killed it and opened it only to find nothing.
Greed oft overreaches itself.
Next up, here’s The Crow and the Pitcher.
A crow, half-dead with thirst, came upon a pitcher which had once been full of water. But when the crow put its beak into the mouth of the pitcher, he found that only very little water was left in it, and that he could not reach far enough down to get at it. He tried, and he tried, but at last had to give up in despair.
Then a thought came to him. He took a pebble and dropped it into the pitcher. Then he took another pebble and dropped it into the pitcher; and another pebble, and another, and another, and another. Over and over he dropped pebbles into the pitcher, till at last, at last, he saw the water mount up near him. After casting in a few more pebbles, he was able to quench his thirst and save his life.
Little by little, you will get what you need.
It’s probably obvious to you, but people who invest solely to acquire as much money as possible are like the countryman in the first fable. There’s nothing wrong with wanting more money, but when more becomes all you care about, it can lead to problems. People like this invest for greed, and they often make mistakes. Sometimes those mistakes come in the form of taking on too much risk, or choosing investments they don’t understand, or attempting to time the market. While such things might work for a while, they can easily lead to disaster. Just as the countryman lost all his future gold by strangling his goose, those who let their greed control them usually lose everything, too.
Much wiser was the crow, and much wiser are those who invest for need instead of just greed. Smart investing involves first deciding what it is that you want. What are your goals? What are your dreams? What’s truly important to you? Once you’ve figured that out, determine what you need to reach those goals. That will enable you to choose the appropriate investments.
For example, let’s say your goal is to retire in ten years. To do so, you decide you need a 5% annual return on your investments over the next decade. If 5% is what you need, why would you shoot for 15%? Sure, 15 is more than 5, but it also comes with more risk. The higher return, the riskier the investment. So instead, invest based on what you need. Little by little is always smarter than all at once.
As you go throughout life, always ask yourself: What do I most want to accomplish? What’s most important to me? Then, figure out what you need to achieve it. Once you’ve done that, you’re well on your way to investing wisely...
From the desk of Brent Woyat