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What investing is

Today's Personal Finance Friday post, by SMI founder and publisher Austin Pryor, focuses on what "investing" is — in contrast to two other things that are often confused with investing.

• Investing occurs when you put your money to work in a commercial undertaking, subject to modest levels of risk, and expect a reasonable return over a long period of time.

  What's reasonable? About 3%–5% more than the rate of inflation.

• Speculating also involves putting your money to work in a commercial undertaking, but it involves a level of risk so great that it's theoretically possible to lose most or all of your capital (the actual amount you invested).

  In return for this high risk, the speculator has the possibility of making an unusually large return (perhaps doubling or even tripling his/her money) in a relatively brief period of time — usually a couple years at most. (Speculating is frequently accompanied by borrowing additional sums for the undertaking and accepting personal responsibility for repaying those sums regardless of the outcome of the venture.)

  Financial options, commodity futures trading, and leveraged real estate projects are common forms of speculation.

• Gambling subjects your money to an exceedingly high level of risk in an attempt to profit from the outcome of a contest or game of chance. There is the possibility of an unusually large return in an exceptionally brief period of time — perhaps measured in minutes or hours. A sure sign that an activity falls under the “gambling” heading is when the activity exists solely for the sake of creating wagering opportunities. For example, apart from wagering, there would be no reason for casinos, horse racing, or lotteries to exist.

What is SMI's position on these three approaches to trying to get a return on your money?

We think gambling should be avoided by all, while speculating should be avoided by all except those with a professional interest and degree of expertise.

In contrast, investing is an activity that all of us, as stewards of God’s resources, are unavoidably called to. Like it or not, as a steward of God-given time, talents, and resources, you are an investor.

Investing, in its broad sense, is simply giving up something now in order to have more of something later. For example, when you put your money into a savings account, you are making an investment decision (less spendable money now in order to have more spendable money later). Or when you volunteer your professional services or personal talents now to serve in a ministry, you're making an investment decision (less free time or current income now in order to have a greater sense of fulfillment and eternal gains later).

In the financial area, there are many ways to invest. But you will increase the likelihood of becoming a successful investor over the long-term if you will take only prudent risks and seek only reasonable returns.

That's foundational to our approach that we call "sound mind" investing.

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