"It is always by way of pain one arrives at pleasure." – Marquis de Sade
No pain, no gain. Perhaps this should be the surgeon general's warning for investing. Higher risk typically goes hand in hand with greater potential growth. Upward price movement feels good. Downward price movement hurts and is much more memorable than the satisfaction of gain. So why should we even take on any of that pain in the first place?
- The dollars sitting in our bank account buy less every day they sit there.
- Markets trend upward over time.
- We need investments to grow our cash and retirement dollars.
Sitting in our bank account... Saving money is a virtue that most would strive for. Effective financial planning is putting saved dollars to work to make sure that our dollars are there when we need them and can do more for us than they did yesterday. Unfortunately emotion gets in our way. Have you ever thought "I would have done better making 0.00005% at my bank than being invested!" That's fear attacking the core wisdom of investing over the long term, or at least investing properly for the time before dollars are needed.
Ignore the shoulda-woulda-coulda, we know hindsight is 20/20. Loss is painful, but inflation is worse! Sitting in a bank account guarantees that the price of the goods and services we buy with those dollars will continually erode the value of those dollars even if we feel our principal is staying flat.
Trending upward. So what to do? We invest in areas that trend upward. US stocks, US bonds, international stocks, real estate, infrastructure and much more. Let's take the S&P 500. Since 1980, we've had 27 of 36 years positive. We've averaged over 11.5% with dividends reinvested! The upward trend has taken the S&P 500 from 110 points to over 2,000. The pain is in the short term drops in the market. Since 1980, we average -14.2% every year. The -9% we just experienced isn't all that abnormal.
We put dollars we need today in lower risk investments so we don't see sharp drops for dollars we need today. The dollars we need tomorrow are invested knowing that risk and reward are two peas in a pod. We use investments expected to grow well over the expected period of time. By doing so, we have a much better opportunity to grow those dollars so they can buy more tomorrow than they can today.
Speaking of tomorrow dollars. Have you heard about the new retirement scholarship? How about the fancy retirement grant? I didn't think so. In today's world, we are responsible for our own future financial goals, the biggest of which is retirement. Social security plays into this picture, but isn't enough to take care of much. And pensions are the exception rather than rule.
Here's a hypothetical illustration that shows why we invest for retirement. Take $100,000 today and saved it in a "safe" investment for 20 years - let's pretend money markets and CDs are earning 1%. That would grow to an amazing 122,000 in 20 years, able to purchase less than $67,000 of goods in today's value. Investing it, earning 7% with the appropriate risk for the same 20 years. $100,000 would grow to about $261,000 - able to purchase nearly 145,000 of goods in today's value.
Sum it up. Why would we want to take on the pain associated with potential loss in investments? In short - because we have to for many reasons. If we want to preserve what we have, grow what we have, if we want to be responsible for our own financial future including retirement, we have to. It's a very different world than it was a few decades ago. Thankfully we have a world of information at our fingertips. It just takes knowing what all that data means and how to remain objective.
The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general
Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. Past performance is not an indication or guarantee of future results.