Why did I decide to invest?   3 comments

Investing. Some people consider it gambling. Which, depending on how one invests, could be regarded as such.

I know that reaching financial independence by 40 will be virtually impossible if I don’t invest. But I didn’t actually have that goal in mind when I decided that I want to invest–I was thinking that I’d retire at the “normal age.”  I just knew that investing for retirement was the “normal thing” to do.

I thought I’d take this opportunity to explain the rule of 72. It is an approximation for the amount of time it takes for an investment to double.

The Rule of 72: Divide 72 by the interest rate of the investment (as a percent, not as a decimal). The result is the approximate number of years it will take for your investment to double.

[It turns out that 71 is actually more accurate than 72. But 71 is a prime number and is inconvenient as a rule of thumb, whereas 72 has 12 factors].

So if you had an investment that averages 8% returns a year, it will double in value in approximately 9 years.

So great! I just need to find an investment that returns 8% a year, and if I, at 31, invest half as much money as I think I’ll need to be financially independent, then I’ll be golden by 40 right?

I wish it were that simple. But the core idea remains – building up wealth for financial independence is made substantially easier through investing.

But what about the risk? I’m sure most of you remember the stock market crash of 2008-2009, even if you didn’t hold stocks back then. Stocks fell 50%+. It was chaos. The risk of losing a significant portion of your portfolio is quite real. And of course, there were more crashes than that of 2008-2009 (and I guarantee that there will be several stock market crashes in my lifetime).

The alternative to investing in the stock market, however, isn’t much better. You trade off one risk for another – you face inflation risk. I’m sure at least some of you are familiar with inflation – prices rise over time. A dollar in 2000 bought a lot more than a dollar in 2014. If your wealth is not growing at least as fast as inflation, your money is losing buying power. Nominally, you’re not losing money, but in real terms (inflation adjusted), you are.

Either way, you face risk. But the stock market, in the long run, has the highest returns among any class of investments that the average investor has access to (I’m not including venture capitalism or landlording for the purposes of this discussion). And honestly, if one day, the stock market does crash completely and never recovers, I’ll have more problems on my hands than the fact that I just lost most of my net worth.

So that’s why I invest. There will be risk whether I invest or not, but investing has a much better chance of helping me reach financial independence. And we can’t ever eliminate risk in our lives anyways.

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Posted January 6, 2015 by Fiby in Uncategorized

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