It is Crucial to Understand Not Just How but Why We Buy
If someone asked you, “Why do you invest?” what would your answer be?
According to a survey conducted by GOBankingRates in late 2019, more than half of the participants had a surprising answer for this question: They don’t. 55 percent of respondents said they have elected not to invest any amount of capital in anything in the past, present, or future.
Pretty hard to imagine, isn’t it?
Fortunately, the odds that this applies to Self-Directed Investor readers are fairly low. After all, if you are interested in self-directed investing, then you probably already are familiar and somewhat experienced with other types of investing, such as the investing that happens when you save for retirement in a captive IRA (one containing investments controlled by your IRA administrator or custodian) or using capital not officially earmarked for retirement.
What is interesting for our purposes about the GOBankingRates survey is not so much that a lot of people are not investing but why they said they are not investing. Only about 1 in 10 respondents said they felt they did not have the education to invest; the majority said they believed they did not have a large enough income with which to make investments of any size or scale. (By the way, we address this very topic on our website. You can learn more about how to grow small amounts of capital in your self-directed account in our online article, “You’re Never Too Small to Start Growing”).
Perhaps most troubling, however, were the 15 percent of participants who said simply they refrain from investing because, well, they don’t want to invest their money in anything, anywhere! They were very honest, saying simply they do not think it is an important part of their financial future. They felt their financial security would work itself out over time.
So, why are we discussing all the people in the world who do not invest when this magazine is specifically for investors? Well, to show that the reasons we invest are really important. Imagine 10 years from now how the various respondents will be doing financially. Likely, the ones who felt they needed more education to get started will now have a “nest egg” and be working to build their capital. The ones who are simply unmotivated to invest, however, are far less likely to be as financially secure. This is because the process of building your retirement capital and savings tends to lead to other financial benefits as well because the positive effects of financial planning in one area tend to leech into other areas of your life. The motivations for today’s actions will drive the results those respondents experience tomorrow.
As Peter Lynch, a famous investor, mutual fund manager, and philanthropist, once said, “Know what you own, and know why you own it.” He applied this standard to his own investments and successfully generated annual returns averaging 29.2 percent over the 13 years he managed that fund, which was the best-performing mutual fund in the world at that time.
As a self-directed investor, you probably are not that interested in making investments in mutual funds, but Lynch’s observations hold true for your investments and your strategies as well. It is crucial to understand not only how the assets in which you invest work, but also why you are investing in them. Even the best investors tend to invest with their hearts as well as their heads. That is not a bad thing, but in today’s market, you must be completely certain that your decisions hold up under an objective lens if you want to make the most of the opportunities presented in this year of constant surprises and volatility.