Why Investing Matters

Why Investing Matters

What does investing mean, how does it differ from saving, and why does time play a central role?

Why Investing Matters
Table of Contents

Key Summary

 
What does investing mean, how does it differ from saving, and why does time play a central role?
  1. Saving prioritizes security and short-term access. 
  2. Investing aims for long-term returns but involves the risk of loss. 
  3. Inflation reduces purchasing power and affects real returns. 
  4. Not investing can create opportunity costs. 
  5. Reinvestment and a long time horizon strengthen compounding. 

Saving generally focuses on keeping money secure and readily available in the short term. Investing has a different objective: Capital is invested in asset classes such as equities, bonds, or real estate so that it can generate returns or increase in value over the long term. However, investing also involves risks, as the value of an investment can fluctuate and losses are possible.

Whether investing is suitable for someone’s personal situation depends on factors including their goals, investment horizon, capacity for risk, and risk tolerance. Two key concepts help put the long-term effects into perspective: Inflation can reduce the purchasing power of money, while compound interest can support the growth of reinvested returns.

Inflation

Inflation is the general increase in the price level. As a result, purchasing power declines: Over time, the same amount of money buys fewer goods and services. Savings that do not earn interest therefore lose value in real terms.

A simplified example illustrates the effect: If inflation remains constant at 1% per year, CHF 100 will have purchasing power equivalent to only around CHF 90 in today’s money after ten years. Actual inflation may, however, be higher or lower.

When assessing an investment, it is therefore important to consider not only the nominal return, but also the real return after inflation. For example, if an investment generates a return of 3% and inflation is 1%, this corresponds to a simplified real return of around 2%. This calculation does not yet account for fees, taxes, or price fluctuations.

Investments can help counteract the loss of purchasing power over the long term. 

Opportunity Costs

People who do not invest their capital avoid immediate market fluctuations, but they also give up potential returns. This benefit is known as an opportunity cost.

Opportunity costs arise whenever a decision is made between several options. For example, if money remains in a non-interest-bearing account, the return forgone from an alternative investment forms part of these costs. However, this does not mean that all available capital should be invested: Maintaining a sufficient reserve for short-term expenses and unexpected events remains important.

Compound Interest

Compound interest arises when returns such as interest or dividends are reinvested. In subsequent periods, both the original capital and the returns already generated can then produce further returns.

At first, this effect is often small. Over a longer investment horizon, however, it can become much more significant because each year builds on a larger base. This requires the returns to be reinvested.

A simplified example illustrates this: An investment of CHF 100 with an annual return of 5% grows to CHF 105 after one year. If the CHF 5 return is reinvested, the return in the second year is calculated on CHF 105. Assuming a constant return, no fees, and no taxes, the investment would grow to around CHF 163 after ten years.

Compound interest therefore shows why time plays an important role in investing. However, it does not guarantee a particular outcome: Returns can fluctuate, fees and taxes reduce the result, and investments can lose value.

Why Starting Early Matters

Starting early can extend the investment horizon. This leaves more time to reinvest returns and recover from temporary market downturns.

Even smaller amounts invested regularly can add up over many years. However, the starting point is not the only factor that matters. A person’s financial situation, investment goals, costs, and chosen investment strategy are also important.

A long investment horizon can help put short-term fluctuations into perspective. However, it does not eliminate the risk of loss. An investment should therefore match the investor’s capacity for risk and risk tolerance and be reviewed regularly.

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