Achieving financial stability and security in the modern era is often challenging. The days of lifelong job security and guaranteed pensions are long gone. Today’s job market is ever-changing, with frequent job changes, new reforms, and corporations continually adjusting their workforce to meet market demands. Governments are also grappling with unsustainable defined benefit (DB) pension schemes. For instance, an ageing population and falling birth rates presents a major challenge for many countries worldwide as the number of workers is shrinking with regard to the number of retired people.
The demographic old-age to working-age ratio is defined as the number of individuals aged 65 and over per 100 people aged between 20 and 64. OECD (2023), Pensions at a Glance 2023: OECD and G20 Indicators, OECD Publishing, Paris,
https://doi.org/10.1787/678055dd-en.
Then an Now
A few decades ago, individuals were not required to review and manage their finances regularly; the pension system was solid enough to provide financial stability to retirees. Moreover, buying on credit was less common than today, so people saved in order to purchase goods by borrowing.
Household debt is calculated as the sum of loans (primarily mortgage loans and consumer credit) and other accounts payable.
The indicator is measured as a percentage of net household disposable income.
National Accounts at a Glance (NAAG), OECD National Accounts Statistics
https://www.oecd.org/en/data/indicators/household-debt.html
Today, the situation is different. Governments have pressing issues to solve besides workers wellbeing and individuals are driven by excessive consuming habits. This makes people more financially vulnerable.
Just as governments have other concerns and difficulties, so too do people. The daily hustle often causes people to focus on immediate and current needs, leaving little room to consider long-term financial goals and stability, such as investing for retirement. Consequently, future financial security is often left until there is little room to rectify or it’s too late, leaving families with an inadequate retirement income or substantial debts.
Why you should invest
Investing is a key strategy for securing your financial future and minimising future debts. By growing your wealth over time, you can rely on investment returns to meet short-term financial needs without resorting to borrowing, and to support your retirement in the long term. Historically, financial markets have shown consistent growth over extended periods, making them a reliable avenue for wealth accumulation. However, many people remain hesitant to invest.
https://www.slickcharts.com/sp500/returns
Investing is Like Any Other Long-Term Life Plan
Many people view investing as unfamiliar, yet they engage in similar processes throughout their lives. Investing is comparable to pursuing a university education; both involve long-term planning, committing resources like money and time, and dealing with uncertainty. When attending university, you set a long-term goal of obtaining a degree, which requires investing in tuition fees, books, and travel. There are also risks and uncertainties—despite your best efforts, you might fail some exams. However, by overcoming setbacks, you can still achieve your ultimate goal of graduating.
Similarly, investing aims for wealth growth with goals such as buying a house, retiring comfortably, or funding education. Just as in education, you invest your money in the market and make regular deposits to increase your capital. Despite periods of gains and losses—much like the academic ups and downs—markets have historically tended to grow over time. By maintaining a focus on long-term investment goals, you can secure your future financial well-being, just as completing your studies secures your professional future.
Viewing investing through the lens of everyday life experiences, such as education, helps to remove barriers and encourages a more approachable perspective.
Stay Focused with Clear Investment Goals
A major reason people avoid investing is the lack of financial planning or clear goals. Consider a weekend plan: when are you more productive—when you plan ahead or when the weekend arrives and you decide on the spot? Planning typically leads to better outcomes. For example, buying theatre tickets two weeks in advance for a Saturday performance ensures that we follow through, whereas waiting until Saturday to decide often results in a range of excuses for inaction—feeling tired, bad weather, or simply choosing to stay home and watch a movie or TV series again.
Investing is similar to planning ahead for a weekend. Without clear goals defined in advance, it’s easy to push it aside. To make investing a priority, tie it to a specific purpose—whether it’s saving for home renovations, buying a new car, or ensuring a comfortable retirement. Having a defined goal gives your investment a clear direction and makes it more meaningful on an emotional level. Just as you might feel excitement when anticipating a theatre performance, picture your newly renovated home, your new car, or your life in retirement. This emotional connection makes your investment goals more tangible, personally meaningful, and highly motivating, encouraging you to stay committed to your investment plan.
Short- vs. Long-Term Perspective on Investing
Despite concerns about the future, we live in the present and tend to prioritise immediate gratification over long-term gains. This tendency often leads to spending money now rather than investing it for future and higher returns. For instance, we might choose to eat a piece of cake today instead of sticking to a diet that promises greater health benefits in the future.
Investing similarly requires a forward-thinking mindset, with rewards realised over the long term. It demands a future-oriented perspective and regular contributions, which can sometimes feel like a sacrifice of current purchasing power for immediate gratification. Many of us tend to favour spending money now rather than investing it for future benefits.
Fearful of Losing Money?
Closely linked to our present-focused mindset is the fear of losses in investing. Individuals often concentrate on short-term losses rather than the potential for long-term gains. This tendency arises because the pain of losing money is frequently more intense than the pleasure derived from gaining the same amount. Consequently, we tend to prioritise avoiding losses over securing gains. Reflect on how much discomfort you would experience from losing £100 compared to the joy of winning £100.
This discomfort is heightened when we evaluate portfolio performance based on recent benchmarks or reference points, which make losses appear more prominent. Investors tend to assess returns on a short time spans, from one month to the next or over the course of a year, rather than considering the cumulative gains from the beginning of the investment. This short-term focus not only increases fear of losses but also goes against the long-term nature of investing.
Adopt an Investment Mindset
The current financial landscape is challenging, making it essential for individuals and families to take greater responsibility for their future financial stability and security. Investing offers a clear path to achieving a prosperous future.
If you’re uncertain about investing, consider that it resembles other long-term pursuits in life, requiring clear and meaningful goals along with a long-term perspective. Rather than viewing investing as a current loss of income or a process hindered by short-term fluctuations, see it as a tool for growing your future wealth with minimal effort.
If this perspective does not convince you to adopt a more investment-oriented mindset, consider this: had you invested £10,000 in 2010 in a medium-risk portfolio of stocks and bonds with a 5% annual return, your investment would now be worth £20,000. Rather than fixating on potential short-term losses, think about the unrealised long-term gains you have missed by not investing.