Here is an article that I wrote on my blog last May.
Let me know what you think.
This is the question I get all the time. When I hear it, I cry inside. Literally…
Yes, I know that we live in a society where finance and money management are not very sexy topics and that most people have no idea of what they can/should do with their money once they actually managed to save some.
But I still get bubbles in the brain when I hear these words: “What do you think I should do with my money?”.
Well first things first, I don’t think you should do anything with it. I don’t care. This is your money; YOU should know what YOU want to do with it. Don’t just ask people what you should do with it!
If you are actually asking this question to people or even to yourself, it means you haven’t done anything with it and that you are not planning to do anything about it. You are just waiting for someone to tell you what to do, and you hope that you will get richer by just following the instructions...
So my first advice is: don’t listen to anyone else ! (and also don't ask me this question anymore) This is your money, so YOU should know what you want to do with it. You can politely listen to any advice, but at the end of the day, only you make the decisions. So keep only what’s useful to you and forget the rest.
People are so desperate and so lazy that they expect a nice short answer like: “buy Stock A and bond B”. People who ask this question don’t realize this is the wrong question to ask. A better question would be something like: “What do I want to do with my money?”.
Depending on what your goals are for your money - buying a house, starting a firm, planning for retirement, saving for a car or for your children's education, getting high returns – you will make different choices about your investments. Defining these goals and knowing what you want your money to do for you is the first step in your investment decision.
Ok, now let’s say you have a slight idea of what you want to do with your money. You want to invest it for A, B and C. What do you do? If you are like most people, you do nothing. You just stare at your bank statements each month and pat yourself on the shoulder because you are actually saving money. Yeah sure, you know there are some things you could do with your money like investing in the stock market or buy some shares in a mutual fund or something like that. But it all sounds very complicated and you heard on the television that the economy is bad and you also heard about that story about people who got scammed and lost everything. At least you are saving money and your money is safe, in the bank’s vault. Also you are lazy, or you really don't have time for that, you are so busy with kids, the job, the last episode of game of thrones...
Let me be clear: the worst thing you can do with your money is nothing!
Why?
Well, first there is inflation of course (use a condescending tone if you quote me); the average inflation rate for the last 20 years was between 1.5% and 3.5 %. It means that everyday your money is sitting in the bank, it is worth a little less. And that’s really not the biggest problem. If you don’t invest in anything you are not making any returns. The average yearly return in the stock market is around 8% after inflation. This is of course on average, but it means that on a long enough period, you will make 8% after inflation on your investments on the stock markets. If you have not invested any of it, you are basically losing this opportunity of 8% plus inflation.
It also works with other types of investment: any money you don’t invest will suffer both from inflation and from the opportunity cost. You could have invested that money in bonds, in real estate, in a business or even a savings account or a retirement plan. You would still have some return compared to your amazing 0% that most checking accounts offer.
Now you should feel a bit worse inside. Good, it means there's still hope for you.
In his book “I will teach you to be rich”, Ramit Sethi makes a nice analogy between food and money. He compares our food and fitness habits with our personal finances habits and shows that people focus on the little details more than the core issues. Like for example how people debate about eating more carbs or more veggies, which types of supplements you should buy, what kind of exercises are best for your abs or biceps. But every one of us knows what the basic principles are to be fit: eat less (and better) and exercise more.
It’s the same with our money: don’t focus on which stock to pick or which fund to buy, don't get lost in the details and the huge amount of data. You just need to start investing now. You can make any investment in the world, you will still be better off than doing nothing with your money. Of course discussing how to invest will also be important in your investment process, but in the long run not investing your money will be what really hurts you.
On average, millionaires invest 20% of their household income. On the average !
So next time you want to ask the dreadful question, ask yourself instead "What is my next investment?".
To get started:
First step: write down what you want to do with your money. What are your goals, projects ? And when will you need the money, 5-10-20 years ?
Second step: start investing today, put your money on a savings account and pick one investment for your goal.
In future articles, I will discuss asset allocation, diversification and the different types of investment options.
http://money-management-advice.weebly.com/articles/what-should-i-do-with-my-money
I love the comparison of money to food and fitness. Also, if you do nothing with your food it eventually spoils. If you do nothing with your fitness so do you!
Love it.
@guillaume-pj - I upvoted the article but here is what I think. And apologies for being blunt...
Statement that the worst thing is to do nothing is just wrong. If you bought assets summer 2008 - you would have lost. If you bought ahead of dot com crisis - you would have lost. Most recent oil drop from $140....
Regarding inflation - we now have DEflation in Europe. In Japan it was a DEflation for more then a decade. What about FX volatility is it worth buying in one currency or another?
The fact that millionaires have been investing over the last year 20% in real estate, stock or bonds market does not mean that this tactics will give you returns going forward. It is CRUCIAL to understand why situation went as they went, if the conditions are still the same, and if not - what is different. And then make conclusion.
And finally, I think asking for an advice and considering different options IS good. You should not start investing "yesterday".... the best thing here is a thorough approach. Unrealised profit is better than realised loss.
Happy to be proven wrong. And apologies once again for being a bit direct.
Hey Conspi, no problem. I appreciate honest feedback.
Here are my thoughts on the subject:
When I am talking about investing, I am not only talking about the Stock market. There are 4 types of different asset classes and I also assume (wrongly?) that people do their homework and don't invest in only one type of asset class, and use some diversification to reduce their risks. (Balancing stock with bonds, real estate with real economy investments, and security assets with personal skills)
I am also looking at longer trends, if you bought assets in 2008 (in all types of asset classes), you would have probably lost money, but in the long run you'd still be ahead compared to someone who just kept cash. My real estate investments from that period still have a positive ROI.
We have indeed experienced a small deflation in Europe for the past few months, and looking at longer trends we can see the overall inflation average rate is still positive and it looks like it will still be positive in 2016. (http://www.inflation.eu/inflation-rates/europe/historic-inflation/hicp-inflation-europe.aspx)
Now Japan is a very special case. I have lived in this beautiful country and they really have a deep fear of inflation that brings them back to the 70s' inflation nightmare. If we look at the longer trends, inflation is in this case slightly positive or almost flat.
Regarding FX and the volatility on the currency markets, I personally avoid any type of FX trade. Most people I know who trade FX 24/7 for banks or funds are getting killed on a daily basis. I have never seen anyone doing this as an amateur or part time, being able to consistently beat the market over a long period of time. There are always a few exceptions but please be very cautious with FX ! Most people who make real money trading FX, are brokers and middle men or marketing experts that themselves carry no risk overnight.
You indeed have a point. The question wether today's market conditions remain the same overall is very relevant. Some people believe our economy is now very different and that we cannot rely on modern portfolio theory anymore. I however, still believe that if you invest your money consistently over time in financial products, real estate, real economy and yourself, you will improve your financial well-being and your net worth overtime.
Asking for advice is totally fine. It's just that most people who "ask me for advice" are just expecting an easy answer and don't want to spend time learning and doing their homework. They don't know what to do with their extra cash and are looking for a quick profit. As you said, there is no free lunch ! My goal is to motivate people to learn about their different options and to choose a financial goal that suits them.
No need to apologise ! Thanks for your reply.
guillaume-pj, Because nearly every government in the world is in debt a world economic collapse is about to occur. A reset of some sort, if you will. Diversity is of utmost importance. I am not talking about diversity in stocks and bonds since most of them will collapse as well. We need to be diversified in food, precious metals, and alternate currencies (BitCoin, etc.).
I totally agree @gamgam, I recommend a couple books if you haven't read them already that I think you might like: the last safe investment (about investing in yourself first), and "Abundance" which shows that most our beliefs around scarcity of resources are not true.
People have been programmed to follow, not think.