How Investments Work

Investments work on a simple principle: forgo consumption today, and reap the ability to consume more later.

If we spend a little less from our paychecks, we can save for retirement. After a little effort spent selecting good mutual funds, the magic of compound interest will cause this money to grow, becoming capable of purchasing more in the future than it can purchase today.

It’s not a big stretch to look at time the same way: if we give up a little time relaxing and invest it in an “exercise account,” we reap the benefits of a longer healthier life. If we give up a little time playing video games to study, we learn a new skill or way of thinking that will enable us to add more value (and earn more income) in the future.

No Guarantees

The challenge that I blew past is selecting the good investment. People win big in the stock market, they also lose everything. Some people exercise their entire lives, yet they die young of an unexpected heart attack. Some people study, earn perfect grades, and yet find no job.

Embracing the Process

The primary result of the investment (future purchasing power, health, employment, etc.) is not the only way that making investments adds value to our lives. We often talk about the value of learning for learning’s sake.

There’s a similar, less tangible value added to our lives when we invest. The act of practicing discipline, reducing consumption, and contenting ourselves with what we already have builds character.

The point? The end goal is only one of the reasons that we sacrifice. The process is the true reward.

One Reply to “How Investments Work”

  1. Ahhhh, yes. The power of sacrifice. One of my favorite books is “Siddartha.” In this book Herman Hesse takes us through the life a young boy on a journey. During that journey he learns three powerful ideals: think, wait, and fast. Fasting is practiced within many different religious communities, but the philosophy is more than just the literal fasting. It is about sacrifice, about going without a luxury for a period of time. I believe that some of the contrast we experience is life is part of what makes it such a beautiful thing. Without pain, would there ever be pleasure?

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