Why Invest?

By Patrick Kerney
NFL Player Engagement

We have two alternatives to investing: spending and saving.  Spending on anything we don’t plan to sell or donate is a 100% loss that we exchange for some level of utility or enjoyment.  Saving, as it stands today, might get us a .25% gain each year.  The problem with this is that inflation will eat away at the buying power of our savings by roughly 3% (by historical average) every year.  For those of us who have grown accustomed to luxury goods and services, inflation for this sector of the economy is generally much higher (2.5% more than general inflation[1]), thereby eating away at our savings even faster than standard inflation.  Though inflation rates and interest rates on our savings are sure to change over time, using the above rates (.25% interest, 3% inflation), any cash sitting in a savings account will continually lose half of its buying power approximately every 25 years (every 13.5 years if you subscribe to a luxury lifestyle).

Perhaps some of us have made/make so much and spend so little that we can afford to let inflation eat away at our buying power in exchange for the peace of mind that we can easily keep track of our money and don’t have to worry about the ups & downs of investment markets or dishonest financial advisors.  That’s the prerogative each of us has.

For those of us who have put away money we don’t intend to use until later in life, there is the option to place this money in the investment world.  The simplest goal for investing is to do so in hopes that our invested dollars will grow at a net rate[2] that is at least as high as inflation.  With this goal met, one would at least maintain their buying power over time.

The more ambitious of us look to investments with hopes to significantly outrun the rate of inflation with the goal of increasing our buying power over time.  It is generally accepted that the greater amount at which an investment looks to outrun the rate of inflation, the higher the risk that an investor will, at any given point in time, lose some portion of their investment.  This loss can range anywhere from a complete loss of investment to a “paper loss” that has the potential to be recovered so long as the investor doesn’t sell the investment.  The size of this potential loss is generally in direct proportion to the level of risk in the associated asset class[3]. 

Another reason to invest is to create passive/investment income.  When we own stock in a company, often times we receive some portion of that company’s annual profit in the form of a dividend payment.  If we have loaned our money to a company or government (bond/debt), it generally has a contractual obligation to pay us an agreed upon amount of interest every year until it repays the loan.  A large benefit of passive income for NFL players is that it is more sustainable than an NFL career and, when derived from both stock dividend and bond interest payments, will be taxed at a lower rate than the active income we have to wake up and earn every day.

Lastly, one can invest to exploit what Albert Einstein deemed “the eighth wonder of the world”: compound interest.  This “interest on interest” is the equivalent of rolling a little snowball down a snow-covered mountain.  Every time it spins around it grabs more snow and grows bigger.  The bigger it gets, the more snow it grabs the next time around.  And so on, and so on.