Salt Of The Earth

What can adults learn from the Water an Salt fairytale? A lot, depending on your investing habits. We sometimes (often?) think of investments like we do games - score more, win big. But in truth it's often about everyday choices.So if you want to be rich, don't chase the yield - chase the habit.
Have you ever read Water an Salt?

It's an old fairy tale (of Italian origin). For those that haven't read it: The king once asked his daughters how much they loved him. The usual hyperbole's ensued - "as bright as sunshine" and "as wide as the ocean" were some of the answers. But the youngest daughter answered "like water and salt". The King became mad and the princess was banished. And only after eating a banquet-full of food that was cooked with neither water nor salt did the king realize his mistake and took back his daughter.

In finance, it's the same thing. We can sometimes loose sight of the basic things and how important they really are.

In forums, I'll often encounter a question about taking out a loan to invest the money. Sometimes a question about whether to invest their lump sum instead of using it to pay off a loan. The worst case, in my opinion, is when I hear people advice a newbie investor about going straight into stock investments (which turns out to be more like stock trading) because all the other investments (like Time deposits and bonds) offer low yields. Second worst is the thinking that you can invest your emergency fund.

We of course want the best, the grandest. And of course we deserve it - everyone is special in their own right... right?

That's why I think that last advice is dangerous. How can I - or anyone - effectively advice caution and stick with low-risk, low-yield instruments while getting your bearings? It becomes practically impossible without sounding relatively unreasonable or negative. And it doesn't help that the stock market had been going through the roof.

We're reaching for the best, the grandest, but we don't look at where we're stepping.

Investing is nothing more than securing your future. If we think about it, for what other purpose are we going to use that money, right?

So why skip building an emergency fund that can save your life from financial ruin?

Why bother taking risks to maybe eak out an extra 1 or 2% of profit instead of paying off that laon and securing your property?

And while there are extremely rare cases when taking out a loan to invest would make sense, why are we thinking about it?

It's all because of that jackpot mentality.

But if we look at it, investing is the inverse of swinging for the fences and hitting a home run. Instead, you save a few pesos here and there, skip an expense here and there, and just accumulate. At some point you'll have capital and you make money off it  - which means another set of saving, lowering expenses, accumulating (additional) capital. That's true for both a business as well as in stocks - where you buy low (save), get the broker with low fees but good service (lowering expenses) and accumulate enough volume to make a big profit later on. And in fact, that cycle is true for pretty much every investment.

So if you want to be rich, don't chase the yield - chase the habit.



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photo credit: treedork via photopin cc

1 comment:

  1. We appreciate the importance of an emergency fund when my wife got sick. Can you imagine if we put all our money in the stock market instead? It will be very painful withdrawing those investment when the market is down! Instead of gaining, we even incur losses.

    I agree with you, we should not be chasing the yield but instead we should create a habit by building a strong financial foundation.

    ReplyDelete