When investing doesn't make sense for you yet
There are situations in life where investing is the wrong decision. This page tells you openly which ones.
Learning objective: After this lesson you can recognize when investing isn't right for you yet.
This site earns nothing from whether you invest or not. That's why it can tell you something you rarely read on brokers' websites: sometimes investing simply isn't your next step yet.
When it is not yet time
It isn't yet if
- you have expensive debt,
- you have no emergency fund,
- you need the money within three years,
- your income is uncertain right now,
- or you want to invest borrowed money.
It isn't either when you're under pressure and want to win back losses quickly. That's exactly the moment when many reach for leveraged products and lose the rest.
Waiting isn't a lost year. Take Lukas: over twelve months he pays off his loan at 9 percent and puts €3,000 aside as a cushion. He has improved his situation for certain. Had he invested instead, he might have improved it. In this case certain beats maybe.
Waiting has costs, and they should be put on the table honestly. With an assumed real return of four percent, waiting a year with €10,000 costs about €400 in expected return. If you pay off a loan at nine percent in that time, you save €900 for certain. In cases like this the numbers clearly favor waiting.
Giving up early
The second reason is the risk of giving up early. If you start without a cushion, there's a high chance you'll have to sell at a bad time at some point. A real loss right at the start puts many people off so much that they never get back in. A later start that you stick with ends up better than an early one you abandon.
Borrowing to invest
The third reason concerns loans as money to invest. Investing on credit ties the duty to repay to a market value you don't control. That's exactly what creates forced sales, which turn a loss on paper into a permanent one. It's the same mechanism as with leverage, just applied to your whole life.
Summary
- Expensive debt, no emergency fund, short time frame: not yet.
- Never invest with borrowed money.
- A later start you stick with beats an early one you abandon.
Did you get it?
Roughly what does a year of waiting cost, and what can it bring?
It costs one year's expected return. If you pay off expensive debt meanwhile, you save for certain and usually more.
Why is quitting early so damaging?
Because a real loss right at the start puts many people off for good, so they never get back in.
Why is investing on credit especially dangerous?
Because repayment is tied to a market value you don't control. That leads to forced sales.
Check your understanding
Your task
Go through the situations from the lesson and answer each with yes or no for yourself. For a debt of $4,000 at 9 percent, calculate the yearly interest and set it against an assumed return in the pay off or invest calculator. Write down what your result means for your coming year.
Sources and further reading
- The Deutsche Bundesbank's interest rate statistics on consumer and installment loans to private households show the actual effective annual interest rates that an expected investment return should be weighed against. View source ↗
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