Before we even touch the topic of investing, I guess the most important thing to do is to understand why you should do it in the first place. I’ll be honest and blunt; investing in the stock market is not my favorite growth vehicle for my money. Yup, you read it right, there are tons of other way you can make your money grow and investing is just one of them. Personally, I rather use my money to grow my online business. This is usually the case with many entrepreneurs; the risk of investing in their own company is higher, but the reward is bigger. While investing, you should not expect returns of 30% per year for several years in a row. When you build a business, those numbers are easily achievable. Unfortunately, investing in a company isn’t a match on a very specific aspect of having money invested in the stock market; liquidity.
Are you liquid?
In your life, you will encounter people that have made a living off various investing vehicles. Some will swear solely in brick & mortars and will favors owning Real Estates stating it doesn’t lose in value. This statement isn’t true (remember the housing bubble in 2008) and still Real Estate investing isn’t liquid at all.
Others will invest in their career. I did this move for several years while I used my time and money to finance my CFP title, my MBA and my broker licence. Investing in my “employability” was a great move as I was independent and didn’t need to kneel in front of my employer. Still, investing in my career wasn’t putting money in a pot where I could dip in when I need cash.
My online income enabled me to travel across the world for a full year and it is now offering me a chance to live well without having to do the classic 9-5 rat race. Many companies have scalable models where constant effort of work is required, but the reward is growing exponentially. While my online income generates a constant flow of money each money, it is not as liquid as the stock market.
The biggest advantage of investing in the stock market is to be liquid. This liquidity is synonym of the flexibility you need, when you need it. I remember building a TFSA (tax free savings account in Canada) up to a few thousands before using it as an emergency fund to pay for car repair. If I needed to withdraw the same amount of money from the equity in my rental property or from my corporate account, it would have been quite a pain and have generated taxes in the latter.
The various purposes of investing
One of the biggest advantage of investing is to be able to set different accounts with the objectives of completing different goals. For example, I have a RESP account (Registered Educating Saving Plan in Canada) for my kids college education with a time horizon of 15 years. I also have a RRSP account (Registered Retirement Saving Plan in Canada) for my retirement with a time horizon of 50 years and a TFSA account as an emergency fund.
Each account is managed accordingly to achieves its purpose and nothing else. Each account follows a different investing strategies while still being connected to the big picture.
Investing in the stock market is probably the most flexible and useful vehicle to finance any projects. You can easily setup an investing account to finance your next trip to New Zealand, finance your children education or buy a rental property. The choice is yours.
What is important is not to put all your money in the same account and use it for various purposes. If you invested all your money in the stock market and you expected to use a part of this money as a cash down for your home next year, you may ended-up be buying a shack if you did this in early 2008. It is wiser to setup a money market account to save your money for short term goal instead of hoping for a good year to boost your return.
Another advantage of dividing your money into various accounts is to benefit from various account types. In both U.S. and Canada, the Government has setup different tax laws to meet various investing goals. For example, you can get a subsidy of 30% of your invested money if you open a RESP to finance your children education in Canada. The money can solely be used to this purpose but it is tax sheltered and comes with a strong benefit. My using advantages of each type of account, you maximise your investment returns without taking additional risk.
We all want to make more money and this is the reason why we invest. However, there is a time to be greedy and expect higher returns and there is a time to be conservative and be content of having cash aside. Answering the question “why you invest” will make you avoid this mistake. Instead of chasing returns, you should be chasing your goals and make them happen through disciplined investing.
Action of the day: define
Today’s action is quite easy and shouldn’t take much of your time. It is crucial you do it now before you continue your investing journey. Define why you invest. Write down your goals and separate them accordingly. Tell me, why do you invest?