Why Invest

The plain answer

You invest to give money for future goals a chance to grow faster than prices rise. Investing means buying assets, such as stocks or bonds, that may increase in value or produce income over time.

Money you need soon has a different job. It needs to be available and stable, so saving is usually a better fit. Money you will not need for years can accept more uncertainty in exchange for the possibility of more growth.

How it actually works

Inflation is the general rise in prices over time. When prices rise, each unit of money buys less. This loss of purchasing power is a risk even when the number in your account does not fall.

Investments can earn a return, which is the gain or loss on the money invested. Returns can come from changes in an asset’s price, interest payments, or distributions of company profits called dividends. Those returns are not guaranteed, and the value of an investment can fall.

Your time horizon matters. A time horizon is the length of time before you expect to use the money. With a longer time horizon, you usually have more opportunity to wait through market declines. With a shorter one, a decline near the time you need the money can disrupt your plans.

Investing also connects your money to productive activity. A stock represents ownership in a company. A bond represents a loan to a company or government. In both cases, you accept uncertainty in pursuit of a return.

What this means for you

The tradeoff is between stability now and possible growth later. Cash is easier to use and usually changes less in value, but inflation can reduce what it buys. Investments may grow more, but their value can change and losses are possible.

Your recommendation is to invest money assigned to goals with a long enough time horizon, after you have covered near term needs and built a financial base. Follow the order of operations for your money before taking investment risk with money that has a more urgent job.

Choose an approach you can continue through both rising and falling markets. A plan that depends on predicting the next market move is difficult to follow consistently.

Common mistakes

• Investing money you may need soon.
• Treating investing as a way to avoid saving.
• Expecting returns to arrive smoothly every year.
• Taking more risk because recent returns were strong.
• Waiting for a perfect entry point instead of using a repeatable plan.
• Buying an asset without understanding how it could gain or lose value.

Related pages

• Investing overview
• Saving vs. Investing
• Risk and Return
• Compounding
• The Order of Operations for Your Money