You have probably read many investing articles in the past. They may have talked about the hottest funds, the best returning investments of the year, a new emerging trend or perhaps a ‘safe’ way to invest. This article is not one of them.
It is designed to clarify in your mind what investing actually means, what it is and what it isn’t and why there is a such thing as investing in a first place.
Investing in a very lose term for placing a lump sum and/or regular sum of money with the view of substantially increasing its value over the long term. There is a difference between saving and investing, even though in order to invest you need to be able to spend less than you earn.
The best way to illustrate what investing is and is not, and to bury the myths that the concept of investing carries, is to compare the investor and the saver.
The main differences between a saver and an investor
The psychological difference
It’s embedded in the person’s attitude towards the future.
“There is a one-word difference between an investor and a saver – fear.”
Savers are the people who are fearful about the future and don’t have the confidence that, in the long run, things will work out to be okay. Savers will never be able to invest their money. At times they might try to invest but they usually get burnt a little and revert back to their ideology which only confirms that they are not actually investing. Subsequently, these people deposit their savings into defensive or cash related vehicles – term deposits, bonds, ‘high interest’ cash accounts.
I’m not going to call these cash deposits as ‘safe’ for a reason, as safety is a very relative term and most of the time misused in relation to investing.
Investors, on the other hand are optimistic people with a lot of faith in the future who know that whatever happens today (or this year) has very little to do with long term outcomes. As a result of thinking differently they are not as concerned about short term situations. These people invest in growth assets. Their attitude never changes and they very rarely have to change their investments.
The ownership difference
Savers don’t actually own their assets. They give up the ownership and lend their assets to other institutions (like banks). They become lenders themselves. As a result they are not rewarded with a growth but only receive an income from their asset.
Investors are essentially owners. They own the asset (buying the bank instead of lending to it) and they are rewarded with growth as well as income from it.
The difference of having a financial plan
Due to the immediate outlook nature that savers have, they traditionally don’t have a date and dollar specific plan in place in regards to their money. They are concerned about the future but they don’t want to think about it. They don’t need a plan as there is no future to plan for. All they are concerned about is now. Now doesn’t need a plan.
The long term nature of investors makes them think about the future.
The real investors’ time frame starts with now and doesn’t really have an end. They understand what they own; they know they will never liquidate their portfolios as fundamentally there will be no reason for it. They understand that they can never afford to give that growth away by liquidating their investments as that would be detrimental to the purchasing power of their money.
The coaching difference
Savers traditionally don’t seek any ongoing coaching regarding their portfolios. They only look at today or this year and for that reason they don’t appreciate any long term benefits of ongoing advice.
Investors’ portfolios often get volatile and even though they understand that volatility is the very reason why they enjoy the premium returns on their investments, they get distracted at times and therefore rely upon external help to guide them and to manage their behaviour.
The real investors also realise that they would never be able to invest on their own. They need the fresh and impartial and emotion free pair of eyes to stop the constant stream of noise that can potentially cause them to make mistakes over the long run. They hire a professional adviser who will stop them from reacting to noise and lead them to wealth.
The only thing to add here is that there is a one big reason why investors invest. And it is this:
Over the long term (and it is the only way they will ever invest and look at things) the only true value of money is its purchasing power.
The only risk to our money is the losing its purchasing power due to inflation. And the only way to effortlessly protect the purchasing power of our money and to inevitably grow the wealth is to invest in growth assets – beautifully managed companies of Australia and the world, and through property. This is the recipe which will provide us with premium growth and income over for the rest of our lives and our children lives.
I rest my case.
To discuss your options, feel free to contact me, Michal Bodi – Click to Contact Michal Bodi