Investing is one of the best things households can do to improve their financial positions, in my opinion. I think if people avoid investing then they could be missing out.
Of course, there are some investments that may go wrong. There are always risks. ASX shares regularly suffer from volatility. Some of the riskiest ASX shares can fall heavily, or even drop to $0.
But, I think there's a big difference between a high-risk biotech, or a mining exploration business, compared to an investment like a blue chip or a diversified exchange-traded fund (ETF).
As long as households stick with growing, resilient businesses, I think they can do well.
Having said that, here are three great reasons why it makes sense to invest rather than keeping all the hard-earned cash in the bank, or under the mattress.
Save for retirement
Building a nest egg could be one of the most important financial goals for a family. But, building a large portfolio doesn't happen overnight. It could take many years. But, households have a good chance of creating pleasing finances by going for it. If we never attempt to grow our money, there's 0% chance we'll have an adequate retirement fund.
Each household's finances are different. Spending goals in retirement can also influence the picture significantly.
As noted by the Motley Fool's retirement guide, according to the Association of Superannuation Funds of Australia's Retirement Standard, "to have a 'comfortable' retirement, a couple who own their own home will need an income of about $67,000. A single person will need an annual income of more than $47,000".
I'd rather build my own portfolio and be able to rely on my own source of retirement funding, rather than hope the pension is as generous in 35 years time as it is now.
If I invested $1,000 a month for the next couple of decades, my portfolio could be worth over $1 million, thanks to the returns the share market typically produces.
Good long-term returns
The share market has done exceptionally well at growing wealth for investors over the long term.
Of course, each individual business has produced a different performance over the years.
However, we can look at the whole ASX share market return. Over the ultra-long term, it has produced an average return per annum of around 10%. Achieving that return would double an investment's value in less than eight years.
While past performance is not a guarantee of future returns, there are some investments that have done even better. Compared to a term deposit, I'd rather go with the return of the share market.
For example, over the past five years, the iShares S&P 500 ETF (ASX: IVV) has returned an average of 12.7% per year and the Vaneck Morningstar Wide Moat ETF (ASX: MOAT) has returned an average of 15%.
Inflation
Inflation devalues the value of a dollar over time. We've just seen a huge period of inflation, which is hopefully over.
But, the Reserve Bank of Australia (RBA) is targeting inflation to be between 2% to 3% in the medium term. While it has some work to do to get to that level, it shows that unless investors are earning a return of at least inflation over time, their money's value is slowly being eaten away.
I think that investing in businesses involved in increases prices – adding to the inflation situation – can help mitigate this erosion and even help investors benefit from inflation.
Having $10,000 is a solid amount of cash. But, in ten or twenty years, that $10,000 may not be able to buy as much as it does today.
Even if a household isn't bothered about saving for retirement, I think protecting against inflation is one of the best reasons to invest.
