Investing, defined by Merriam-Webster’s dictionary, is to “commit (money) in order to earn a financial return; to make use of for future benefits or advantages; or to involve or engage especially emotionally.” As we see the markets sell off this week with the S&P500, Dow and Nasdaq all nearing correction territory from their highs made in August, we wonder if the markets will begin to crash. With a possible battle to fill the seat of Ruth Bader Ginsburg approaching and the Presidential Elections occurring in a little more than a month, if the election results are contested similar to the Election in 2000, and with a vacant seat in the Supreme Court, what will happen if there is a stalemate in the supreme court with a 4-4 vote. Aside from the coming election, we are also in the midst of a pandemic, there are fires, hurricanes and protests occurring throughout the country, which makes it more difficult to look past all this uncertainty and into the future, or at least the near future.
When we invest for the future, and we purchase stocks and bonds, we expect these investments to grow and generate a return. The very definition of investing is to commit money to earn a financial return for future benefits, and trust me, when you invest your money, many emotions are involved. But what exactly is investing? When you invest in bonds and stocks, what exactly are you doing? Technically, you are lending your money. When you earn money from your job or business, there is only so much you can do with that money, you can either spend it or invest it. So if you decide that you want to buy a Treasury Bond, you are essentially lending that money to the U.S. Government so they can spend it how they see fit, while you wait to get your money back, plus interest. Same goes when you buy Corporate Bonds, you are lending money for interest to Corporations so they can grow their business, buy equipment, payback their other debtors with your money or payback their shareholders through dividends or buybacks. When you buy stocks, again you are lending your money to Corporations, but in return for partial ownership of the company and to share in the cashflows that the company generates in the future.
If the word lending were used to replace investing, it would give a different connotation. Now, if you are working hard everyday and after paying your taxes, paying for health insurance and covering your living expenses like food and shelter, and you have a little bit of money left over, and all you can do with this money is spend it or lend it to others, what would you decide to do then? If you do decide to lend it to others, you may want to know how likely you will get this money back and how much interest you will receive.
Now let’s say your Uncle Sam, who has always paid back his debt on time and in full, has an unlimited amount of capital, but owes money to friends, family, neighbors, the banks and maybe even some loan sharks, and will give you his word (not collateral), is asking to borrow $100 and will give you 13 cents if he can pay it back in a year or 28 cents per year if he can pay it back in 5 years, 68 cents per year if he can pay it back in 10 years, and $1.42 per year if he can pay it back in 30 years. First question I would have is, if he has access to unlimited capital, why would he want to borrow from me? I have also heard that he has a lot of expenses and is sick and hasn’t been having luck finding work, which is probably why he’s been borrowing from others recently, and since we are family, I feel his word should be good enough, but those rates aren’t enough for me to part with my hard earned money.
Should you spend your money or lend it out? There are a few things that you would like to buy, but you figure you can hold off and see if you can earn a little more interest on the money you have. You thought about lending it to the bank, but they are only giving a penny for the same amount but if you lend them the hundred bucks for a year, they will give you 3 pennies, which is still less than your Uncle Sam. You make inquiries and hear that lot of businesses around you want to borrow money. Some of them will promise to pay it back with interest in the form of a loan while others want to partner up with you and instead of paying it back will share their profits (or losses).
Since the pandemic, many people have been hunkering down at home and not going out and spending the way they used to. This must be affecting a lot of businesses. If you are going to lend your money out, the most important thing is that you get it back. After you are certain, or almost certain, that you will get your money back then can you only think about earning something on that money. After all, if you lend your hard earned money to others and they don’t pay you back, wouldn’t it be better to just buy things that you have always wanted (maybe even a house) or go on that trip that you have always wanted to take? Especially if things are going to be “at least 2%” more expensive next year, maybe spending some of that money this year, especially if a lot of struggling businesses begin to discount their goods and services. If you do decide to invest, especially for future benefits or advantages, you may want to wait until the future is a little more clearer, maybe after the elections.