The small decisions: What is investment mentality?

Money management is a subject that people all too often put off. However, we all make decisions on a daily basis. Decisions about making payments, paying for small everyday purchases, and setting aside money to pay bills or cover potential unforeseen events. 

However, all these circumstances are typically dominated by a short-term mentality. People tend to prioritize paying their monthly bills, buying essentials, and spending money on recreational activities, such as going out to dinner or taking vacations. In all these small decisions, one crucial element is missing from the equation: investing.

Harv Eker's famous saving method states that the ideal scenario is to allocate 10% of your income to savings or investing, which is the best formula for long-term saving. This is a small monthly percentage that can prove to be decisive and transformative over long periods of time.

The best way to illustrate this is with an example. Someone earning €2,000 a month should allocate around €200 to long-term savings. Over a period of 10 years, they will have saved €24,000. However, if the same amount of money had been invested in an investment vehicle with an annualized return of 7%, the savings would amount to €35,480. If the period were increased to 20 years, the total saved without investing would be €48,000, whereas, with investing, this amount would have been transformed into €105,276.

This example alone illustrates the huge potential for anyone, regardless of their income level, to put aside a portion of their salary for investment. 

Investing offers multiple possibilities. It involves buying financial assets with the hope that they will increase in value over time, thus making your money grow. When investing in more conservative products, such as fixed income, the strategy is to allocate the money to finance a country or company and receive in return the amount borrowed plus the associated interest.

Regardless of the numerous ways in which money can be invested, the mentality is very similar to that of a gardener or anyone who loves plants. You plant a seed and water it regularly to make it grow.

In this case, investing entails reserving a portion of your monthly income to buy financial market assets with the idea that they will appreciate in value and your money will grow. Essentially, this means planting a seed every month and letting time do the rest. 

Investing involves risks. However, there are several ways to mitigate these risks, such as investing in different types of assets (referred to as diversification) and opting for long-term investments. In terms of investing in Switzerland, three of the country's most successful international funds accumulated a 10-year annualized return of 6.49%.

In this regard, it is also important to take into account the harmful effect of inflation on our purchasing power. As prices continue to rise across the board year after year, our savings are worth less, meaning that you can buy fewer things. The general average is 2% inflation, meaning that every year, any savings that are uninvested remain at a standstill and lose value. In other words, the alternative to not investing is losing money. A person who has saved €10,000 over 10 years would have lost the equivalent of €1,830 just by choosing not to invest.

Due to current levels of financial literacy, only 58% of people in the US have some form of equity investments, while in Europe, the figures are much worse. According to ECB data, only 13% of households have investments in funds, and 11% invest in listed shares.

This is essentially due to financial literacy or the lack thereof. According to the European Commission, only 18% of Europeans have a high level of finance, the same percentage of those with a low or zero finances. Furthermore, many people view investing negatively and regard the stock market as a casino or a high-risk endeavor.

It is worth mentioning the situation in Latin America and the Hispanic population in the USA. According to a Pew Research Center (PRC) study, only 28% of Latinos in the United States hold shares in the stock market, far below the national average of 58%. What's more, according to the Development Bank of Latin America and the Caribbean, 61% of people do not save, and those who do primarily save informally by stashing cash at home.

However, this assessment of the stock markets is entirely wrong. We only need to review the performance of the main global indices in recent decades. For example, over the last 32 years, the S&P 500 index has had an annualized yield of approximately 9.79%, despite the financial crisis. Meanwhile, the MSCI World Index, which tracks the world's leading companies, has grown by 8.37% annually since 1987.

Compound interest has been defined as the “eighth wonder of the world,” and for good reason. This phenomenon occurs when you invest over the long term, as annual profits enable you to generate new profits. If you had €10,000 invested (without adding anything else) and earned 10% per annum, the first year, you would earn €1,000. Then, in the second year, you would earn €1,100, and in the third year, you would earn €1,210 since the profit from one year accumulates for the following year. It is like planting an orange tree, and instead of eating the oranges, you use them to extract the seeds and plant more trees. In the second year, you will have more trees than the first year and produce more oranges. If you do this year after year, you could have dozens of orange trees.