What’s the Point of Investing?

Why do we do the things we do? What’s the point? What’s the purpose?

There are many ways to go about approaching this topic but one useful way to answer this fundamental question is the pursuit of inter-temporal happiness. I don’t like the word “happiness” – satisfaction might be better – but I think you know what I mean. You want to be as “happy” as you can be for the most amount of your life as possible.

Today

It appears as if most people forget this whilst going about their lives. It’s hard for us to think about the future when making decisions in the present. Most don’t consider the sugar crash that comes 30 minutes after the high when eating a donut, let alone the accumulated damage that will have consequences years later. We are simply not designed to think long-term: Homo sapiens roaming around 100,000 years ago were largely thinking about where their next meal was coming from, not retirement plans. Our hunter-gatherer ancestors didn’t know when they would see honey again, so they ate as much as possible whenever they could find it. We have to exhibit more restraint (honey now is now cheaply and abundantly available to anyone with access to a Tesco).

We have to face the reality that actions today can have consequences that impact the distant future. This is why living as if there is no tomorrow is foolish. Maximising your happiness today/next week/next month is likely to have negative effects on your future bank account/health/relationships. This is fine if there is no tomorrow…but there is.

Tomorrow

At the same time, living only for tomorrow comes with its own problems. 

For starters, you don’t really know how long your life is going to be. Those who start work at 16 and save as much as possible in the hopes of retiring at age 35 may not make it that far. Those who work their whole life for the sole purpose of enjoying their retirement at age 70 have a similar problem.

We are also pretty bad at knowing what exactly will make us happy. We know how to generate endorphins within the next 10 minutes, sure. How to maxmise the total satisfaction of your next month, let alone your whole life, is less clear. Think of the body builder who foregoes any palatable food for months in order to look good on the beach for his 1-week holiday to Ibiza, only to discover that it wasn’t worth it. Or think of the countless examples of rich people on their deathbed who regretted working too hard or who find their massive amounts of accumulated wealth unfulfilling. 

Money

Having said that, it’s pretty clear that more wealth will generally increase your happiness, all else being equal. Having money removes your money problems, leaving you with only those more-important problems not associated with money. It gives you freedom and access and excitement and many other things that generally make life better.

So, more money is likely to be a good thing in terms of happiness. In here lies an opportunity. You see, money is time-discounted, but happiness is not.

Future money is less valuable than current money; that’s what real interest rates are for – they represent the value of time. Spending money today has an opportunity cost – this cost is the returns one could have received in the form of interest on one’s money. This is why future money is worth significantly less to us today.

Happiness is not discounted. There is no reason (conditional on me surviving that long) that having a 10/10 day next year should be worth less to me than having a 10/10 day today. People seem to have trouble understanding this, as we discussed earlier.

In here lies the value of investing. If consumption equates to happiness, £10 spent today would result in the same happiness as £10 (in real terms) spent one year from now. But £10 one year from now is worth less than it is worth today because of real interest rates.

But remember, we have the option to invest that £10. Imagine we invested this £10 and received the real interest rate of 1%. In one year’s time, I will have £10.10 to spend, which will give me £10.10 worth of happiness, instead of £10.

Happiness is not time-discounted but money is.

This is why investing is so powerful. We can increase our future happiness by more than it costs to lose a little bit of happiness today.