What to invest in and how to invest are often discussed at length. So, why not go a step further and examine why investing is considered a good use of money in the first place?
The truth is, we are not programmed to invest. Like many other things in life (“Come inside or you will catch a cold”, “you have to train if you want to become an athlete”, “you have to study if you want a job one day”) investing means sacrificing immediate enjoyment in exchange for potential benefits in the future. There are two go-to reasons that most investment professionals present for your consideration. There is a third reason worth considering (ah, the suspense!) but let’s first review what common wisdom dictates.
Reason 1: A smarter way to achieve goals
Google “why invest?” and you’ll probably come across one of these two statements:
“Invest to grow your wealth over time and reach future objectives”
“Compound interest makes your money work for you”.
These are the two mantras of any respectable financial institution, and they pretty much say it all. To accomplish some objectives, you probably need more money than you currently possess. By investing the money in your savings account that you don’t need urgently, you could achieve these goals. Does it work? It depends where you invest your money, but on average yes (we’ll also see later as well that averages are not always something we should trust).
Building on Compounding Returns
One advantage of investing is that if you get it right – your money benefits from the snowballing effect of compounding, the primary mechanism behind investing.
Financial advisors often run this sort of simulation to illustrate compounding: invest 100,000 CHF today and let it grow at an annual rate of 5% (a magical number in the financial industry) and in 15 years you will end up with almost double the initial amount. 207,893 CHF to be precise (chart 2). We just need to find the magical investment to generate that 5% for the next 15 years, but that’s a different story.