Here is an interesting question: What does it actually mean to invest? When we were thinking of topics to bring to you, we kept coming back to foundational questions, to help you understand what we are really doing. At the most fundamental level, investing is spending time, effort, or money in the hopes that whatever is acquired or built will return a better value to you in the future.
In one sense, we invest every day. For a simple example, we may spend time building a deck on our house, because we value the time we will spend there with family more than we valued the time, effort, and materials it took to build it.
Before we continue, perhaps it makes sense to question why we should invest at all. Why not just spend all our money as we earn it? Well, if we could work all our lives, and earn what we need up until the day we die, there would be no need for financial planning at all. That used to be a reality. The average life expectancy of someone born in the 1920’s was 53 years. Fortunately, general health and medical advancements provide most of us with a much longer life well beyond our working and earning years.
For a time, pensions were somewhat common, to provide income after our productive years. Now, however, pensions are quite rare.
So, back to the question – Why invest at all? People have to invest because they are likely to outlive their ability to produce income, and most people would like an income and lifestyle above the income provided by Social Security.
There are many types of investments available. Two very common types are:
1. Stocks – owning a portion of a company and participating in the potential profitability of that company. The company may pay out cash on hand to owners in the form of dividends. At some point in time, the investor may sell their ownership interest. If they can sell it for more than they paid, a profit will occur there as well.
2. Bonds – loaning your money to a company. The company then has regularly scheduled interest payments, and eventually a payment to return the principal of the loan.
One subject that comes up relative to investing from time to time is the sense of “gambling.” There are a few common sources to this feeling. Market volatility is well reported in the media, can create unease, and is completely outside of your control. There are a few things within your control, however. Proper diversification and asset allocation can change both the level of risk and types of risk in your portfolio. It really takes a team approach between the client, the advisor, and professional money managers to consider these things to be systematically and purposely invested.
Patrick Stoa
For questions, comments, and conversation, call us at 920-617-6830
Any opinions are those of Mike Macco and Patrick Stoa and not necessarily those of Raymond James. Diversification does not ensure a profit or guarantee against a loss. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Dividends are not guaranteed and must be authorized by the company’s board of directors. There is an inverse relationship between interest rate movements and bond prices. Generally, when interest rates rise, bond prices fall and when interest rates fall, bond prices generally rise.