Investing is important to individuals and societies for many reasons. Before diving into the details, it might make sense to define what investing is.
No other word is so often adopted as a description for other activities.
What is considered investing?
Commonly people refer to their investments when they are discussing saving, speculating, spending, consuming, donating or other activities. These acts have certain things in common with investing, but they are not synonymous.
A very general description of investing is to use money in hopes of a future benefit.
For example, you can purchase a stock in hopes it will increase in value or a bond in expectation of interest payments during ownership. Some situations are a bit tricky. Buying a piece of real estate as a rental with the expectation of future returns is an investment. Conversely, buying real estate for personal use and enjoyment without expecting a return in the future is a purchase. The item doesn’t dictate if someone is investing as much as the fact that they are attempting to produce a future return.
Inherent in the idea of a future return is delayed gratification. One must have the ability to forego additional immediate consumption to gain the potential for a return. No one likes to delay gratification for its own sake.
Given the choice of a dollar today or a dollar ten years from now, almost everyone would take the dollar today. If the prospects of additional return are great enough, investors are willing to receive them in the future.
The additional capital that an investor can use in pursuit of a return is valuable for those with a greater need for capital right now. This can either be a company raising funds in the public market for the first time in order to grow their business; or a holder of an existing asset deciding to sell to meet a different objective today.
In either case, when the investment goes well, we have an example of a positive sum game or “win-win” where more than one party in a transaction benefits. This is a simple example of why investing is important to individuals, families, and society overall.
Investing is Important for Individuals and Families
Investing will be important in the lives of individuals and families for many reasons. We all have goals of various kinds, such as:
- Saving for retirement
- Starting a family
- Assisting with a child’s college education funding
- Purchasing a home
- Starting a business
- And other desires along the way
Since most of us do not have the financial ability to cover the cost of all our goals presently or by simply saving alone, investing can help us achieve them.
In fact, it’s not uncommon for those with long-term investment goals to find that the return they have received has done as much or more of the heavy lifting in achieving their goals as their own contributions. Put simply, we can better meet our future objectives by investing.
And what about the hypothetical person who does have enough financial resources to cover all their anticipated future needs?
Even someone in this situation may have objectives to create a legacy after their own life to preserve their lifestyle for subsequent generations of their own family or promote charitable activities. Some of the most well-known investors are also among the largest charitable givers. The contributions of Warren Buffet and others to the Bill and Melinda Gates foundation is only one of many examples.
Investing is Important to Society Overall
In addition to its importance for individuals and families, investing is also important to societies overall. Governments wish to encourage investing and ensure that a framework exists for investors to efficiently participate in markets.
Even some of the laws in the Code of Hammurabi, one of our oldest remaining examples of law in a society dating from the 1750s B.C., relate to investing. One could claim that investing is fundamental to society.
Often governments strive to provide incentives for investors such as tax-favorable treatment of investments or reasonable and predictable regulatory environments. The degree to which a positive environment for investing exists, often referred to as “investment climate,” the more likely investors will choose to invest within the city, state or country that provides this climate. (This can include the climate for not only direct investments such as forming a business but also indirect ownership of stock or other “paper assets.”)
Even if investors do not choose to give to charitable causes with the proceeds of their profits or leave a legacy for others, instead using all their proceeds from investing during their own lifetime, they still benefit society overall by investing. This may seem counter-intuitive since your perception of an investor is likely one of an individual motivated by profit rather than an external altruistic objective. If we assume that that is true, investors still benefit others in many ways regardless of their objective.
Simply by being an additional participant in the market they increase liquidity, making it easier for others to perform transactions in an efficient market rather than illiquid market. They also provide needed capital for companies to expand or governments to borrow.
While many investors are passive, there are many who take an active role in the investments they hold. This “skin in the game” that an investor has in the success of their investment can increase their incentive to make the investment successful, which can benefit all involved.
We often forget about the importance of our investments and the concept of investing in general. Sometimes this is a goal since too frequently monitoring or transacting in our own accounts can be counter-productive if we are implementing a long-term strategy. This doesn’t mean that investing isn’t extremely important to us personally and collectively in every day of our lives.
Our own retirements, children’s education and financial stability depend on our personal investments. The company we work for, facilities and infrastructure we use, prescription drugs we take and products we buy often exist because people were willing to accept risk and delay gratification to achieve a return. These are only a few of the many reasons why investing is important.