Part 1: What is an Investment?
Before we can talk about investing we need to define what exactly an investment is. Merriam Webster defines investment as: “the outlay of money usually for income or profit : capital outlay; also : the sum invested or the property purchased”. If that were the only definition of term, “investment,” then why do so many advertisers and marketers tell you to “invest” in their product, whether it could be profitable or not? Educational institutions tell you to “invest in your future.” Are these individuals and organizations deceptively using the term? Are these examples of false advertising? No, I would argue that although the dictionary definition describes a type of investment, the definition is far too narrow. I would define an investment as, “a commitment of resources to derive a future benefit.” Those resources could be financial of course but they could also be effort, energy, attention or ultimately and most importantly, time. Time is really our most valuable resource as it is really the only non-renewable one. We should discriminate the most about how to invest time.
Now that we have defined the broader concept of an investment we should break it down even further. Investments can be separated into two main categories, active and passive investments. Here, we are not talking about actively or passively managed financial instruments but weather or not an investor is actively participating in obtaining a benefit or just contributing resources and waiting for a reward. This is not really an either/or categorization per say as much as it is a spectrum. A purely passive investment might be something as simple as a US savings bond where you commit a sum of dollars for an expected financial benefit of additional dollars in the form of interest. While closer to a purely active investment might be the time and energy commitment of getting up and going for a run each morning for an expected benefit of improved health and possible weight loss. Investments that fall on the spectrum of requiring both active involvement and passive resource commitment could be anything from starting a business in your garage to pursuing an MBA from Harvard.
So, the question that usually comes up next is, “which is better, an active or passive investment?” The answer, of course, depends. It depends on what skills and resources are currently at your disposal. What we are really looking for is the greatest benefit for the resources committed. This is more commonly referred to as Return on Investment or ROI for short. That return, or benefit, can be measured in many ways. It can be measured by financial profit, happiness or fulfillment gained, physical or health improvement, or time gained or saved. The value of each of these benefits is, of course, up to the individual investor. Arguably, though, if time is the most valuable resource, measuring the ROI by time saved or gained is a fairly good measure of the benefit of any given investment.
Next time we will discuss how to go about choosing where to invest your resources based on two factors. First, what resources do you have at your disposal and second, what is the desired benefit or ROI? That second consideration is directly linked to the very important question … what are your GOALS?
