Investing: Why Invest?

So why do you want to Invest?

As the current credit crisis has shown, investing because other people made money in the market is not the right reason.
The right reason to invest is to protect your money from the bite of inflation. Over time, the purchasing power of money decreases.

To illustrate the power of compounding, consider the chart below

A bank might return 5% annually. Over twenty years, $100,000 in the bank would be worth $265,000. However, if Inflation is 5% as well, you have not gained anything in purchasing power. Consider another investment that returns 12% annually. Over twenty years, this investment would be worth $965,000.

Historically, over long periods (twenty years or more), stocks have proven to have the highest return with the least risk. Short term stock market returns can vary widely. One year returns can be astronomically high, or disastrously bad. Even for five year periods, it is possible that the return from the stock market would be negative.

For any twenty year period since the world wars, stock returns have been superior to those of gold, debt or inflation.