Tuesday, June 24, 2014

The World's Best Investment Is an Investment in One's Self

For the longest time, I've had an interest in the stock market. The whole concept of making money from just using my brain turned me on. And don't get me wrong - being invested in the stock market over the long term is an excellent idea. A dollar invested in the S&P 500 Index (a group of companies that are generally thought to be a bellwether for the United States economy) in 1970 is now worth $77.79. For a shorter time frame example, imagine buying an index fund in 1994 - twenty years ago. If you invested $10,000 in that index fund, today you would have $106,960.86, for a compounded annual growth rate of 12.98%! 
All of the above goes to show that the stock market can be a fabulous investment. However, I do not believe that the stock market is the best investment.

After learning so much about personal finance and travelling along my own journey to being at peace with money, I've realized that the world's best investment is an investment in one's self. An investment in one's self can be obtaining higher education, getting coaching, getting training, doing something enjoyable that relieves stress, building one's self esteem or one's business.

The primary reason that I believe that an investment in one's self beats investing in the stock market every time is that the returns from the stock market, over the long-term, are capped at around 20% per year. That is an astounding compounded annual growth rate, but it's not one that the majority investors can achieve. In fact, the only investor who has achieved such a feat by investing in companies/stocks over a 40 year period is Warren Buffett. So unfortunately, it's unlikely that we can achieve the same sort of rate of return. When we invest in ourselves though, the potential return is unlimited.

Investing in ourselves allows us to get and maintain a job, which allows us to save money to even put to work in the stock market or other prudent risk taking endeavors. Without employability or marketable skills, there is no ability to build wealth. Also, Warren Buffett is famous for saying that in all risk taking endeavors, one should stay within one's circle of competence. That is to say that if you are most interested in fashion or the culinary arts, then you should devote all of your time and energy to becoming the best couturier or chef/restaurateur, and not to picking stocks. You can have a professional do that for you.

When you invest in yourself, you increase your human capital and financial capital to invest in things outside of yourself!