The answer to the question ‘Why Invest?’ is simply for retirement. Investing is necessary for retirement. You do not want to work forever, right? Great, we are on the same page! But some of you may ask, is saving not enough? Investing is risky. Many people lose money when investing. Let us unpack this topic in this article; maybe, you will change your mind afterward.
For some of us, investing feels scary. We live in a chaotic world. Investing now may be a bad idea. There are so many reasons not to invest:
- The stock market can drop 50% and wipe out our money within a few months.
- Isn’t the recession coming? Every economist has mentioned this over and over.
- Layoffs everywhere, or maybe you are even impacted by the layoff.
- Perhaps even depression is coming?
- Is nuclear war coming? We’re getting closer and closer to this nuclear war.
- Banks are failing across the globe.
- US Dollar is about to collapse and lose its world reserve currency status, right?
We can keep going on this list. It is neverending. Sooner or later, there will be more reasons pop up. These are all valid reasons not to invest, right? Better safe than sorry.
Graph 1: Dollar Purchasing Power Index
Graph 1: The purchasing power of the dollar over the years. (Credit to VisualCapitalist)
The chart above shows a dollar’s worth over the years. As you can observe from the chart, the value of one dollar has dropped significantly since 1920. To be more precise, the dollar purchasing power has dropped more than 90% over that time!
- $1 in 1930 bought you ten bottles of beer
- $1 today buys you a small cup of tea
- Can you imagine what $1 will buy you when you retire?
If you wonder why our money keeps losing its purchasing power, the answer is inflation. Let’s say inflation for this year is 4%: that means your money has lost 4% of its purchasing power this year. Over an extended period, inflation will erode our purchasing power significantly, just like what you see in Graph 1 above.
All fiat currencies in the world are not backed by anything. The dollar was backed by gold until the US government abandoned that standard in the 1970s. Thus, the central bank can technically print as much as they want as long as the inflation is not too high. In 2020 alone, the Federal Reserve has increased the total USD money supply by 20%. Now you won’t be surprised why inflation was sky-high in 2022.
So, why invest? By not investing, you will lose your purchasing power over time due to inflation. It may feel fine in the short term, but you will feel this erosion over the long term.
Graph 2: There are many reasons not to invest, and one excellent reason to invest
Graph 2: S&P500 performance since 1930. The chart is marked with various events causing market uncertainty over the years. (Credit to VisualCapitalist)
If you are worried about the state of the economy, geopolitical tensions, wars, etc., this Graph 2 is for you. There was Great Depression, World War 2, the Korean War, the Vietnam War, the Chernobyl disaster, the 1987 crash, the Gulf War, the Asian financial crisis, Dot com bubble burst, 9/11, the Iraq war, the 2008 Global financial crisis, and so on. Yet, the S&P500 still returned >15,000% over the same period.
There were always events that caused market uncertainty at any point in time over the last several decades. To be a successful investor, you should always be comfortable with market uncertainty. All those events are legitimate reasons that may cause a market downturn in the short term, but you will likely come out on top if you hold for a long time. The odds are in our favor based on historical performance.
So why invest? There is one excellent reason: regardless of all the short-term volatilities from all those market uncertainties, you will likely come out on top over the long term.
Why Invest? Which do you prefer?
We have presented you with two graphs. Which graph do you prefer?
- If you are okay with Graph 1, you can put your money in your savings account.
- If you prefer Graph 2, you need to invest. There are always many reasons not to invest at any particular time. Uncertainty is neverending. But there is one excellent reason to invest: historically, you will likely come out on top if you stay invested for the long term.
Let us summarize why you should invest:
- When investing, you may lose in the short term but will likely win in the long term.
- If you are not investing, you may win in the short term but will likely lose over the long term.
The choice is yours, which do you prefer?
