Tuesday, April 29, 2014

Investing Isn't Saving

Mass confusion
Clouds inside your head
--The Cars

Pundits constantly confuse saving and investing. Saving is setting economic resources aside for future consumption. Risk, defined as potential for loss of those resources set aside, is low.

Investing is allocating economic resources toward projects speculated to yield a return. Risk necessarily accompanies prospective return. Generally, the higher the possible return, the higher risk of losing some or all of the invested resources.

To be sure, saving and investing are related. There can be no investment if there is no pool of saved economic resources from which to draw. Investment capital necessarily comes from savings.

However, once economic resources have been invested, they are no longer saved. Instead, they are employed by the people involved in investment project. For example, while they are building productivity enhancing tools and techniques, workers consume savings in the form of food and drink. If these resources were not saved elsewhere, workers could not survive while working on projects aimed at improving productivity.

In projects yielding a positive return on investment, more output is ultimately created than input is consumed. In that happy case, then investors get back their original resource investment plus more.

In the unhappy event that the project consumes more input than it generates in output, then investors get back less than their original resource amount. In fact, they could lose all of their original investment.

When entrepreneurs invest in a new venture, few would suggest that these individuals are "saving for retirement."

When people allocate funds to equity and other risky investment positions, why, then, do we often view this as "saving for retirement" rather than "speculating for retirement?"

1 comment:

dgeorge12358 said...

There is no such thing as a nonspeculative investment. In a changing economy action always involves speculation. Investments may be good or bad, but they are always speculative.
~Ludwig von Mises