Posted On 13 Nov 2012
What’s the best investment if you value increasing your financial wealth?
The answer is simple – and the justification for it is important to understand.
It’s the continuing investment in your own financial education.
The justification for that answer is that everything is impermanent. The world is in ceaseless flux. Either your understanding is keeping up or your understanding is becoming obsolete.
It’s not only that the pace of change has increased, it’s that we are in economic circumstances that are fundamentally unlike those we’ve ever been in before. (For example, markets have become global, which means that they are synchronized. This means there are no markets elsewhere in which to move money.) The territory ahead is uncharted.
This is in stark contrast to the way things used to be. Using fossil evidence and DNA analysis, which uses molecular clocks to estimate mutation rates, scientists have determined that our own species has existed for about 150,000 to 200,000 years.
Until the first agricultural revolution the pace of change was very slow. Yes, there were climate changes to which our ancestors had to adapt, but Stone Age cultures were much simpler than our own and they changed very slowly.
Nearly all humans who are alive today understand that, as technological innovations continue to proliferate, the pace of change seems to keep accelerating in this era of fierce competition, global economic warfare. Economic winners and losers are constantly rising and falling.
This is why, if you don’t make the best investment by regularly attempting to keep up with our rapidly evolving economic environment, you are increasingly at risk of becoming an economic loser. The best investment is in developing your own understanding.
It is not necessary to be financially wealthy to live well. From various studies that I’ve read about as well as from my own observations, there’s no correlation, for example, between being wealthy and being highly satisfied or happy. In fact, living well has nothing or almost nothing to do with your possessions.
There is, though, a negative correlation between being poor and being highly satisfied or happy. If mere physical survival is always a very difficult struggle, it’s unnecessarily difficult to feel highly satisfied or happy. It’s unnecessarily difficult to live well if you are poor.
The countries that rank the highest in terms of satisfaction and happiness have consistently been the northern European countries in which nearly everyone is middle class. They are characterized by a very small percentage of poor people and a lack of obsession with wealth creation.
Having more possessions (including money) than your neighbors won’t make you much (or even any) happier than your neighbors. The more you own, the more attachment you may have to what you own and the more you may fear of losing it. On the other hand, life becomes unnecessarily difficult for those who are economically poor.
So, in economic terms, a middle way seems best.
If it’s best for you and me, it would be best for others, too. In my own country, the U.S.A., it’s disgraceful that we have such a high percentage of those living in poverty. It would obviously be best to adopt policies to reduce that number, but, of course, there’s disagreement about which policies those are.
As a practical matter, normal adults ought to take responsibility for their own economic situations. At least in countries like mine, it’s foolish to rely on others (or the government) to ensure that you become (if you are not) and remain at least economically middle class.
These observations about the pace of flux and the wisdom of being middle class provide the justification for the claim that the best investment in terms of your flourishing financially is the investment in your own education. Instead of attempting to change your economic, political, and legal environments (even if the changes you prefer would be beneficial), change your own mindset. If you do, you will likely be more effective changing those environments in the long run.
If you are also an American, it’s important to realize that recent changes have made it more important for you to invest in your own financial education. Here, as examples, are three. First, in recent decades there has been a shift by employers from defined benefit retirement plans to defined contribution retirement plans. Second, in 1971 President Nixon was forced to sever the (USD) currency from its remaining gold backing. Third, in 1974 the ERISA act made it mandatory for individuals to take charge of their own retirement accounts.
If you do not take charge of your own investments, either someone else will do it for you or you won’t have any investments.
I am not suggesting that it is necessary to become an economist! I am, though, suggesting that you regularly invest some time and energy in your own financial education. It is too dangerous not to.
What is necessary? Understanding the fundamentals. This means understanding the cycles that the major classes of investment go through and keeping up to date on where we are in any given cycle.
Imagine this: suppose I handed you $10,000 to invest immediately or lose it. You could keep whatever returns it made. What would you do?
There are four classes of investments open to you right now, namely, stocks (or businesses), bonds, real estate, and commodities. What percentage should you put into each of those four?
If you are clueless about where the relevant cycles are, you would be clueless how to invest that $10,000 wisely. This happens frequently with respect to lottery winners. Since (as a group) they lack an investor’s mindset, they are clueless about what to do with their winnings and sometimes wind up more broke than before.
Here’s the point: in general, there is no right answer.
In other words, it is not always better to invest in stocks than in the other three, in bonds rather than in the other three, in real estate rather than in the other three, or in commodities rather than in the other three. Nor is it a good idea to diversify and put, say, one-quarter of it into stocks, another quarter into bonds, and so on.
What you should do to maximize the returns on your investment is to put all $10,000 into whatever is the best asset class at the moment. Which one is the best at the moment? The answer depends upon when the question is asked.
Furthermore, getting the class of assets right is insufficient. If it is stocks, which stocks should you buy? If it is bonds, which bonds should you buy? If it is real estate, which kind of real estate should you buy (and which real estate within that kind of real estate)? If it is commodities, which kind of commodities should you buy (and which form of that kind of commodities)?
For example, if you think that the value of commodities will rise for a while faster than the value of assets of the other three kinds, which is the best commodity to purchase? If, for example, the answer is “gold,” what kind of gold should you invest in: bullion, numismatics, ETF’s, options, mining stocks, etc.?
Furthermore, maximizing the returns on your investment also means understanding when to sell. If you don’t understand this, you don’t understand wealth cycles. You haven’t really understand impermanence when applies to our economic environment.
[The answer, which anyone who has actually made the best investment should understand, for a gold investment is: near the peak after a bull market in gold. Of course, that answer is useless unless you understand how to determine when the peak occurs.]
For example, being a “gold bug” is simply being attached to gold. Such people have obviously failed to make the best investment. Like all attachments, that kind of attachment is foolish. With respect to gold, there’s a time to buy (when its purchasing power will be increasing for a while) and a time to sell (when its purchasing power will be decreasing for a while). It’s the same for all the other kinds of assets.
Why think at all about this? Here’s what I believe: right now, in November 2012, the greatest wealth transfer in history is taking place.
I won’t here even begin to explain the evidence for that. For the moment, just assume that it’s true.
Do you want wealth transferred to you or away from you?
If you want wealth transferred to you, I encourage you rapidly to make the best investment, to educate yourself about what is actually happening. If you don’t and wait until the transfer is over, you may regret it for the rest of your life.
As always, if you know someone who might benefit from reading this post about the best investment, please pass it along.
Recommended post about the best investment: Increase Your Assets.
Recommended readings to make the best investment: Click on the following link and then scroll down the page to the section “Our best self-help books on financial well-being”: books on financial well-being