DISCLAIMER: I am not a financial advisor and this should not be taken to be financial advice. You should consult a financial professional for advice. I am a financial amateur. These are my thoughts and opinions on money that I have recorded here for my children, with the hope that my thoughts might help them. They are responsible for the results of the advice they choose to follow. Always worth keeping in mind: Past performance is no guarantee of future results. Your mileage may vary. The map is not the territory. Keep your eyes open. Smell it before you take a bite.
To my children:
Money decays. If you do nothing with your money and don’t grow it by investing, then your savings will slowly become worth less. You’re on a ship with a slow leak and you need to patch the small holes that slowly appear, or else you’ll sink.
I remember when stamps were 20 cents. At one point, they were 25 cents, and now they’re 50 cents. If you don’t grow your dollars, they won’t keep up with the rising prices, That dollar that used to be able to buy 5 stamps and send 5 letters, decayed until it could only buy 4 stamps and send 4 letters, and now that very same dollar can buy only 2 stamps and send only 2 letters. If you invest in something that outpaces the rate of inflation, then the $1 that could buy 5 stamps will grow to $2.50 or more and you could still buy 5 stamps and send 5 letters today, even though the price of stamps has increased significantly.
The average Inflation rate in the USA is 3%-4%. The average return rate of the (S&P 500) stock market is 9%-10%. So if you invest in a stock market index fund, then your money should be able to keep buying at least the same amount of stamps that it used to.
I think the reason people don’t invest their money in the stock market or in other places is that they’re afraid of losing their money. So they keep it in cash, hiding under their mattress or in a checking account. But that’s not where money wants to be. Dollars are seeds. Seeds want to be planted and grow and make more seeds. They don’t want to be stuck in a closet inside a seed packet, never seeing the light of day.
If you’re very risk averse, then choose a very low risk investment, like an index fund or bonds. Even though people are afraid of losing money by investing their cash in something, the more certain way to lose money, over the long term, is to keep it in cash.
Loss aversion is when people are averse to losing what they have, like their savings. But you should also have a fear of missing out on the potential gains that are out there.
Bottom Line: Money decays over time, so choose an investment that will likely outpace the rate of decay.