Why Investors Invest - Three reasons to Love Investing

David Long
July 6, 2018

Financial services have gained a poor reputation, deservedly so in many respects. The banking crises, miss-selling, high charges (historically), mediocre returns and low interest rates have all contributed to a general distrust of the industry.

The response has been an explosion of regulation and its associated costs, an obsessive pursuit of ultra-low cost investing through passive investment, and a near abhorrence of all risk. Today, for the vast majority, investing is something largely to be avoided! Savings tend to be held in bank deposits earning little or nothing, and retirement plans frequently amount to leveraging modest savings to buy a property-to-let, a strategy that perhaps worked well as interest rates fell, but now presents significant risks.

It is no coincidence in my view that this comes at the same time as weak growth and low productivity, coupled with increasing divisions in society between those on the ladder and those that feel left behind. Ironically, the regulatory ‘cure’ may have become worse than the original issue.

It is time to change these outdated perceptions. Investment is the foundation of a liberal free-market economy with the power to spread prosperity and encourage social mobility like nothing else. So, let me explain my top three reasons to fall back in love with investment:

No.1: The Power of Compounding

Investment is not, and should not be, the preserve of the privileged few. Rather, it is the means by which the whole of society is enriched. The chart below illustrates the power of investing just £250 per month, adjusted for inflation, over an average career of 40 years, from age 25 to 65.

£250 per month may seem like a very small sum in the normal context of wealth management. Certainly, it is affordable for the majority of households, and if properly invested with only moderate risk it is likely to grow surprisingly fast. Reaching around £45/60,000 over ten years, £150/250,000 over 20 years and building to an extraordinary £900k/2.2million over a full 40 year career.

Saving and investing such a sum each month is undoubtedly life-changing not only for you but for your children and future generations, enabling previously unimaginable possibilities whether that might be private education, a house deposit, university, starting a business or simply achieving your

retirement dreams. What’s more, the averaging-in effect of investing small amounts each month actually reduces your overall risk enabling such investors to accept more short-term volatility in pursuit of greater long-term returns.

No.2: Investors Shape our World

It is easy to let politicians and big businesses determine the world we live in, as well as to blame them for all that we see as wrong with society. However, in a free market economy, neither the politician nor the big business is as powerful as you, the humble investor, are. Through your investment decisions, collectively with millions of others, capital is continuously recycled from one enterprise to another; ultimately determining which projects succeed and which fail.

Truly, investors have the power to shape our world. However, to do so effectively we need to make everyone an investor and moreover, an active investor. In this context, the trend towards passive investment is deeply troubling. Certainly, there are strong arguments for passive strategies in some circumstances, but we must be careful. Passive investment now accounts for nearly one-third of the market and has become a major systemic risk.

The ‘invisible hand’ of the free market economy relies upon the free, rational and independent decisions of all participants. Imagine for a moment the consequences for a market with 100% passive investment. Decisions are based solely on market capitalisation; no assessment of value, no consideration of merit, no accountability for boards. Each investor simply follows every other investor in an endless loop. This is a pyramid scheme of epic proportions that at best leads to dramatic volatility and weak returns, and at worst, it could precipitate a complete collapse of the market.

No.3: Investment is the Ultimate Win-Win

Investment fundamentally drives the prosperity and growth of civilisations. No advancement of humankind has ever been achieved without investment. This might simply be the investment of time and energy in the education of our children. Or perhaps the investment of labour and surplus food in developing a new idea to improve production. Over centuries, through specialisation and the exchange of surplus production, people were able to invest in better tools and machinery to yet further advance capacity and generate greater surpluses, which could again be recycled through investment in the next advance.

It is only in relatively recent times that investment has constituted itself in a monetary form, enabling far greater and more efficient recycling of these surpluses (capital) to promote new enterprise, technological development and productivity. Indeed, the amount of capital that is available for investment is a critical factor in determining both the pace at which any economy can advance, and the limit of the economic potential of a society.

Our prosperity therefore relies upon all of us saving and investing whenever we can, in return for long-term investment returns- the ultimate win-win scenario.

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