I strongly believe that the majority of people who don’t invest their money, most probably also don’t understand our economic and monetary system. There is otherwise no other valid explanation or reason, why any sane person earning enough to build up savings would not routinely and diligently contribute at least a small part of their savings into some kind of investments.
Investing itself is no rocket science and requires almost no effort. It actually only requires commitment and patience. There are many different ways of how investments can be pursued, but the easiest and most accessible one is certainly the stock market via ETF-index savings/investment plans. Therefore also the advice from one of the richest person on the planet, Warren Buffett, that the best investment most people can make, whether they’re wealthy or just have a few hundred dollars to invest, is a low-cost index fund.
We can, of course, have a debate about this and we could find some cases and examples that could undermine this statement – in some cases. But I actually like to learn from smart people who simply know what they are doing, who learned the lessons and are more than happy to share them with the world. It would be just not smart to ignore such learning opportunities.
Why it got to work out
Are there risks involved? They certainly are.
Is it a totally safe investment? It certainly isn’t.
So why should you put your hard earned money there? Well, because at the end of the day it just got to work out. Here is the idea behind it.
Good or bad, our economic system is designed for growth. As long as we keep developing, building, expanding, increasing consumption, researching etc. – our economies will grow. As long as the growth is intact, money is being created and wealth is increasing. However, as everyone noted by now, only a small percentage of people worldwide actually participate in the growing wealth. You might have guessed it: Largely, the investors.
There are people who think that we are approaching a limit for growth. I won’t debate about it but let me just say: Those people couldn’t be more wrong.
The world population is still growing, technology is increasing faster than ever and I am pretty condifent to see humanity going beyond the limits of earth within my lifetime. You remember how your parents were always telling you that there are no limits to what you can achieve? They were probably wrong, but there are certainly no limits to what humanity can achieve. This is what I believe. And this is also, why growth and wealth creation will continue.
What can go wrong
Now, despite being very optimistic, there might be some bumps along the way. If economies stop growing and a country or the entire world falls into a recession, wealth is being reduced. This is not a theory, but a regular occurrence. The most popular country caught up in a recession is probably Japan. Despite it’s amazing technology development, large population and being home to some of the largest and strongest companies in the world, wealth creation has stagnated or even declined in Japan.
This is the reason why every time you watch news, people are really getting serious about growth. Even small percentages or differences can cause heart attacks, since the outcoming results can be devastating. But exactly, devastating for who?
Now, here it get’s tricky, because while the wealth of investors can be significantly increased during growth periods and reduced during a downturn, investors are probably not the ones who will suffer the most. The one who suffers the most will be the average Joe. Why is that?
Well, the simple point is that investors can control a few things and actively reduce their risks and protect their wealth through active risk management. This may include many different options, from increasing efficiencies at their business, working on better economies of scale, merger & acquisitions… but it may also include simple, old-fashioned cost cuts. Closing down factories, reducing work-force and everything else that might be deemed necessary to reduce their losses or to protect their profits.
This may sound cold and terrible, but it is a purely logical process. Something everyone of us would do, even on a much smaller and simpler scale, like for example when managing our household budget. You might not be able to “fire” members of your family when times get tough, but you might consider sending everyone who reached working age to some kind of work. You might scale down on your house-helpers or gardeners if you had some before. You might cut your Netflix account, put tighter limits on your credit cards, swap your groceries purchasing routine from monthly to weekly or even daily, get rid of you 2nd car, move to a smaller house or condo, etc. Well, in business all the same things are being done, simply on a larger scale.
Why it’s the average Joe without investments who suffers the most
This is the main reason, why being invested is the best thing you can do, in good, or in bad times. Because if your company needs to scale down and you lose your job, then there is probably not much that you could do about it. The same goes for, if your work benefits are being reduced, or your pensions shrink or anything else that the business needs to do in an attempt to reduce their own risk. The average Joe without investments got no say and no alternative.
When you are invested, some part of you is on the other side of the game. Because the money you invested makes you, to a very small part and depending on how much money you put in, a partner and co-owner of the business. It means that all these things that the business will do to protect either its survival or its profits, or simply to reduce its risk exposure, all those things are actually being done for you. To protect your investment.
And not only this. When focusing on dividend stocks or index funds that payout dividends, as long as the business makes profit, it will also keep paying you. While others get their pay-checks cut, you will most likely still keep getting dividend payments.
A dividend cut may occur, for various reasons, but if it happens, then in most cases it will truly be the absolutely last resort for the company. And even if the business should require to propose a dividend-cut, well, as an individual owner of the company shares (not so with an index fund), you will have a vote on this. How many employees get to vote whether they can keep their jobs when a difficult situation comes up?
Investing is the only smart thing to do
On the other hand, as a simple employee without investments, you are not even participating in the game. When you lose your job and the economy takes a dive, you will need to tap your savings, to borrow money or to go for social security. Neither options is pretty. For those who were parking money regularly on a savings account things can get even worse, because just within a few months they might deplete and completely destroy all their years of savings in the process.
As I mentioned, there are no guarantees and even the best investors lose money sometimes. BUT in the long run, as an investor, you have a realistic chance of accumulating tremendous wealth, build up passive income and to actively participate in the wealth creation in the process through dividend growth and compound interest.
It is truly the only, reasonable and proven system to accumulate wealth, which doesn’t require any effort, skillset, or qualifications. All you need to do is to simply invest regularly, disciplined and with patience. Time, growth, and dividends will do the rest. This is why to escape the rate race, the stock market is my way to go.