Why Invest?

Why invest? Because there will be a tomorrow. If not for you, then for someone you love.
How to invest? Start with what is in your hand.
When to invest? Now. Don’t wait for the perfect investment. Do something that makes sense today.

For the sake of this article, let’s divide all investments into two categories, cash and equities. Yes, I know this is overly simplistic, but I am trying to be overly simplistic.

Think of cash as something that keeps its value over time, a dollar buried in a mason jar is still a dollar, guaranteed. Basically there are two kinds of cash, short term cash and long term cash. Short term cash would include $20.00 bills, checking accounts, savings accounts, and money market funds, money you can put your hands on today without penalties. Long term cash would include investment grade bonds, government securities, and certificates of deposit. While a 2% bond will crash if interest rates jump to 10%, it will regain its value as it approaches maturity. When that bond reaches maturity, the holder will receive the cash value of the bond no matter what the interest rate.

Equities are the other kind of investment. These are basically ownership rights that never expire. A share of Exxon stock represents some miniscule bit of a great enterprise. You own it and if you are lucky it pays you a dividend, every quarter. You can own shares in individual companies or baskets of different companies called mutual funds, exchange traded funds, or closed end funds. You could also buy 10% of your buddy’s start up business or even own your own company. All of these investment vehicles I term equities.

Of course there are other things that are not really this or that, consider gold and preferred stock. I consider gold to be money. I know that it is just another commodity that rises and falls in value according to the law of supply and demand, but in my head gold is money. Preferred stock is neither a stock nor a bond. It has no ownership rights, generally it has no fixed value at a future date, generally preferred stock is not perpetual, but it does pay a dividend, usually a very good dividend. Just for grins let’s throw that one into the equities bin.

Real estate beyond your home, which is as much an expense as investment? Let’s consider investment properties whether owned individually or as shares in a Real Estate Investment Trust as equities.

You need all of the above to mitigate risk, individual risk and systemic risk. You can’t hold everything in cash because of the risk of inflation and taxes. You can’t hold everything in a single equity because of individual risk. British Petroleum was one of the best companies in the world. It was well managed and it paid a terrific dividend. BP was even the best play for investing in alternative energy technology. Then a black and oily swan flew over a deep water drilling platform in the Gulf of Mexico. BP lost ½ its value in a few weeks. Owning mutual funds protects you from individual risk, but not from systemic risk. If the stock market crashes, your funds will crash with the stock market. If that happens, you want cash, a lot of cash. Then you can snap up bargains when everyone else is panic stricken.

I can’t predict the future so I invest a little here and a little there. A little bit done on a frequent and recurring basis over an extended period of time works.

Don’t get too smart for your own good. If you can’t explain what you are doing to a junior high school student, you probably shouldn’t be doing it. If you don’t understand it, don’t buy it.

Don’t wait for the perfect time or the perfect investment. Do something today. If you are afraid the market is overpriced, put a little bit in a Government insured money market fund. If you are afraid of inflation or taxes buy a share in a stock or a sector fund your research tells you is undervalued. If you are afraid of inflation and the market, consider a hybrid fund that invests in both bonds and stocks.

Don’t be afraid to make mistakes, little mistakes. If a couple with a combined income of $60,000 a year carrying a typical mortgage payment and a car note with $15,000 in the bank, invested $1,000 in BP right before the oil platform fire. They lost $500, painful but not the end of the world. If they had invested their entire $15,000 that couple would be a world of hurt, probably for at least 2 years.

Above all, get out of debt. Let’s say you have a credit card balance that carries a 12% interest rate. Paying that card off is a guaranteed after tax rate of return of 12%. Where in the world can you get a better return on your money?

Now let’s be careful out there!