Thursday, February 14, 2008

Fear Of Investing

Its a ride

Can you win the financial game if you are fearful of investing?

A friend of mine abhors the market and as a result shies away from any and all investing options. He is a big proponent of saving and frugal living so he has been building up substantial savings, which sit in low yield savings accounts. He likes to pay cash for his purchases, including big-ticket items like cars and home improvement. He is smart to save, live frugally and not get into high interest loans but that is not the full story.

His contention is that he sleeps better at night knowing that his money is safe. My contention is that he has a false sense of security. Here is why -

Capital Erosion
The big culprit here is inflation. If you do nothing with your money - over time it will lose its value. In other words - your buying power will reduce over time as cost of living increases and prices of goods go up. So if you have a big bank balance today but are not growing your money to keep up with inflation - you will have less money down the road. Sad but true!

Knowledge Deficit
There was a time when I did not know much about the stock market or investing. I trusted others with my money and was happy to be earning and spending. The issue was a lack of education in matters related to finance. Like many other facets of life - if you want to succeed you have to work hard at it. Your job, your business, your marriage, your kids and your money all require your time and commitment.

Knowledge about money management is an essential requirement in today's world of self-managed retirement and limited retirement benefits (corporate or governmental). Ample resources exist to educate and equip you with the right knowledge and tools - but it is an investment you have to make.

You can save all you want but if you cannot grow your money - your financial life will be very challenging. Here is a simple example to illustrate the power of compounding and reasonable market returns.

Suppose I invest $10,000 for 20 years in the US stock market and get an average return of 10%, which grows compounded. At the end of 20 years I would have about $60,000. A gain of about $50,000 in 20 years.

In the other scenario we start with $10,000 sitting is a savings accounts that returns only 3% annually. We add $1,000 every year and let this money grow compounded over the next 20 years. You end up with $40,000! A gain of only $10,000 after 20 years.

The market and investing principles may initially sound intimidating but they are not. Start small, take baby steps, read, learn, listen and in no time you will on your way to managing and growing your money.

"When your money doesn't feel appreciated, it won't appreciate for you in return."
Love Your Money. It Will Love You Back

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