You can’t invest in nothing

Here’s a simple thing which, evidence would suggest, is not obvious to many people:

You can’t invest in nothing.

Especially when there is a lot of volatility and uncertainty it’s tempting to think that you can opt-out and choose not to choose at all.  But, whether you like it or not, everything you have is invested in something.

Think about what you do with your money…

If you prefer cash under the mattress, you are investing in a specific currency and making a bet against inflation.  Ideally you’d choose a currency that reflects the things you might want to buy with that money in the future – if those things are imported or priced to compete with imports, then that’s unlikely to be the currency you use everyday.

If you put your money in the bank or in a term deposit you are backing the institution which holds the cash for you.  Of course, they almost certainly don’t actually “hold” it as cash – so, always ask yourself what they are doing with your money in order to be able to pay you interest.  The recent collapse of dodgy finance companies has shown that even though this option might seem safe, the risk you’re taking is not zero.

If you buy stocks on the sharemarket your investment is a bit more obvious.  Perhaps the company will do well and the share price will go up?  Or, perhaps the company will do well, but not as well as other people were expecting when you bought the stock, so the share price will go down? (remember, a share price is just a measurement of current market expectations).  Maybe you think it would be safer to invest in an index fund, but keep in mind that an index is just a collection of companies and this same logic applies to each of them and therefore to all of them together.

If you buy a house then you’re investing in the local property market.  If you have a mortgage you are borrowing (and paying interest on that loan) in order to be able to invest more than you would otherwise be able to afford.  It’s interesting how willing banks are to lend and people are to borrow to invest in property when they would be very unlikely to do that for any of the other investment options listed here.  But, I’m not going to criticise anybody for this choice – despite being a vocal advocate of renting as the sane mathematical choice, this was the first thing I did when I had the opportunity.  Actually, this is more of an issue for those who own multiple properties, or see their one house as a savings scheme rather than just a place to live (you can’t eat your house).  Either way, when you’re calculating the returns on your investment make sure you account for the full cost of owning the property over time – including insurance, rates, maintenance and the opportunity cost of the capital.

If you have your own small business then you’re probably investing in several different ways.  Perhaps you put up the capital to get the business off the ground?  Perhaps you pay yourself less than you could earn elsewhere.  These are just slightly longer term investments, in the hope that the business will grow and pay you back eventually.  When you look at it this way, I wonder how many small businesses perform better than the equivalent amount of cash in the bank, when all things are considered?

Maybe you prefer to spend than to save.  At least by investing in expensive toys today you will have less of a problem deciding what to invest in down the track!

Even if you give your money away, you’re effectively making an investment in a charity or non-profit to do something useful with that money.  Or not, as the case may be. (see: Real Good Not Feel Good)

Perhaps you can’t decide, so spread your bets, and do a little bit of each of these things?

Still every dollar you have is invested in something.

Of course, money is not the only scarce resource you have – the same thing is true of your time.

What are you investing your time and money in at the moment?

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