Why should I invest is a question that millennials will do well to consider. In today’s consumerism obsessed world, wealth is seen as something to ‘collect’. Yet investing is actually about protecting your purchasing power, not necessarily increasing your overall wealth. Let’s consider other reasons why you should invest!
The other reasons why you should invest
Understand the risk of inflation
How investing can be rewarding
Do you remember how much a pint of milk cost 5 years ago? Probably not, but it would have been less than today. This is inflation. Prices inflate over time. If you do not grow your purchasing power, you will have less money in your wallet after buying your pint of milk.
Investing, i.e. growing your wealth, means you are able to maintain your standard of living as prices increase of time. If you get an annual pay increase of 2%, but prices increase by 4%, then you are poorer! Your purchasing power has actually decreased by 2%. Inflation risk is therefore something to take seriously.
If you invest some of your savings into an ETF tracking one of the major stock markets, the wealth created (over time) will offset the increased cost of life. One of the beauties of investing in companies, is they can pass on increased (inflationary) costs to their clients.
At the time of writing, logistics costs have gone through the roof with many firms passing these costs on to clients through price increases. If you invest in companies who have this ‘pricing power’ then you will benefit from inflation. You have to invest to do so though.
Since the Second World War, government healthcare and social programs have increasingly become fall-back options for people in trouble. Governments’ response to the Coronavirus through furlough programs, is incredible. People today have got into the habit of expecting the state to help them out.
What if the state could not help you out? This is another reason why you should invest. By investing money, you are putting that money aside for a rainy day. It is advisable to have the equivalent of 3 – 6 months daily outgoings in cash in case you lose your job.
With cash yields virtually non existent, why not buy some premium bonds? Being backed by the UK government they are arguably safer than depositing your money in a bank. The possibility of winning one of the larger prizes is appealing from a return perspective.
For those with a higher risk tolerance, you could invest in a sensibly allocated stock portfolio. Many ETFs and investment trusts pay attractive dividends. This means that your portfolio regularly has some cash available if you need it. This could provide a combination of an emergency cash reserve but also capital growth.
For younger readers this may not feel relevant but as work place pensions are not enough it is a further reason why you should invest. Although many are choosing to retire later, we are also living longer. The increased reliance we have on the state to look after us in old age may not be enough. Having enough for retirement is not only about paying the bills but as you get older and more infirm, have you considered the increased cost of travelling or healthcare? Standing up for 30mins waiting to board that easyJet flight to visit your grand-kids abroad, is difficult when you are older and your body gives out on you. Having saved enough to pay for the (increased cost) of speedy boarding is an example of something worth considering.
Humans like information, especially new information. For those who like to stimulate their mind, the fast moving world of business can be fascinating. Firms who are disrupting how business is conducted can easily lead to some megatrends.
Thematic investing also forces us to be aware of the latest ideas. These start of as themes and can turn into highly profitable businesses. Although Amazon suffered during the dot.com crash, it has now has become the ubiquitous place to order our desires from.
Can you identify the next unicorn?
Taking a view through putting your money at risk should lead you to do more thorough research that most commentators have performed. Surely (hopefully!) making some money and increasing your knowledge at the same time is appealing?
Today’s mainstream press is full of stories of do-it-yourself-investors. Interestingly there is an increase in younger people investing. Although many of these have gone into high risk Tesla stock, for those who want a margin of safety, it is possible to introduce some portfolio protection to your investments.
There are many events in life which can be easier to deal with if we are ready for them financially. By putting money aside through investment, you are preparing yourself to face future liabilities. If in the process of doing so, you can gain knowledge and wealth, this can only be a positive. It is possible to invest sensibly without taking too much risk. This is the essence of capital preservation!