Investing in the stock market can teach us three valuable lessons about life. The first lesson is that we need to take some risk if we want the possibility of reward. To make money in the market, we have to be willing to lose money. And so it is in life, if we want to excel at something, we have to be willing to fail. If we want to grow, we have to be willing to stumble. As for me as the author of this essay, if I want to my words to have a chance of being helpful and memorable to someone out there, I’ve got to take the risk that I could be misunderstood.

But this first lesson from investing may not be compelling enough to persuade every skeptical earner to participate in the market. That’s because everyone wants to make money, but not everyone has a strong enough desire to make money that this desire would outweigh their interest in keeping what they already have. A person who hopes to build a nest-egg for the future might hate the idea that thousands of hours of their own personal labor could go to waste because of random fluctuations in the stocks they bought. If investing were only about making money, if it were only about seeking a reward, then the danger might not seem worth the stress.

But investing teaches us a second lesson about life which is that risk is not monolithic. There are kinds of risk. There’s short-term risk and long-term risk. These are different beasts, and we’ve got to consider them differently. 

When you put money in the market, you’re taking a short-term risk. The value of your investment could be cut in half tomorrow. But that only matters if you need your money tomorrow. What’s the chance that your investment would still be down after 20 years? If you kept investing in the market over that time, what’s the chance you’d regret it in the end? 

Assuming you can wait 20 years and assuming your investment is properly diversified, then the chance of losing money in the long term is negligible. Of course, the global economy could experience a systemic crash and fail to recover, but then all bets are off. In practice, your risk is all short-term risk. As for long-term risk – the chance of coming out worse after 20 years of being in the market – you can put it out of your mind.

And so it is in life: there are behaviors that bring significant short-term risk, but if we continue the behavior over time, the long-term risk is negligible – we only stand to gain in the end. Speaking as an introvert, I can say that it’s a risk to go to a party. An introvert like me could have a miserable time at any particular party and come home exhausted and dejected. But what’s the long-term risk of repeating this social behavior over 20 years? Almost certainly, an introvert who regularly pushes themselves to socialize is going to be better off because of it. That doesn’t mean they have to go to every party, but if they keep going to some parties throughout a span of 20 years, they’ll have more good conversations, make more satisfying connections, and be exposed to more valuable opportunities than if they behave as a hermit. All said and done, they would have taken many short-term risks and regretted some of them, but in a way where their long-term risk was always essentially zero. 

But maybe a potential market investor isn’t convinced by lessons one and two. Even understanding that risk is necessary for gain, and that short-term risk and long-term risk are different beasts, a person might wish to put their money in a savings account and not have to worry about risk at all. This leads to the third lesson from investing, which is that security is often an illusion. 

You can “save” your money by putting it in the bank. But you can’t save your buying potential by putting it in the bank. That’s because banks don’t pay enough interest to help you maintain your purchasing power as the price of stuff rises in time. 

What if you passed up a $4 smoothie in the year 2000 so you could put that $4 in the bank and treat yourself to a deferred smoothie in 25 years? If you fast-forward 25 years, the $4 in your savings account would not have kept up with rising smoothie prices. Even if you earned a dollar or two in interest from the bank, you wouldn’t be able to afford a smoothie that now costs $12. The bank seemed like a good place to park your $4 but it wasn’t a good place to park your ability to buy a smoothie.

In general, a savings account might appear as a secure place for your money, but it’s not a secure place for your buying potential. What does this mean for investing? It means that you might want to invest because you like the idea of making money, but you have to invest if you want to avoid losing your buying potential to inflation over time. 

This third lesson presents an alternate way of thinking about investing. Most people who invest would say they’re hoping for gain. They’d say that investing is about accepting the possibility of short-term loss to attain the likelihood of long-term gain. But we can take gain out of the picture and focus exclusively on loss. We can say that investing is about accepting the possibility of short-term loss to avoid what would otherwise be the certainty of long-term loss. The motto could be: “Lose small now so you don’t lose big later.” Maybe that’s a negative perspective, but it provides a strong motivation to invest: no one wants to lose big.

And so it is in life, there are times when we think we can stay secure by staying home, by staying out of the action, but that security is an illusion. In fact, we’re locking ourselves into loss when we favor the option that seems the safest. 

In 2022 I gave one of the best musical performances of my life. It was a special and unrepeatable moment because I had just lost my brother. My emotions were raw and I was able to channel those emotions through my singing and playing. The audience was electrified.

A year later, I signed up to perform again at the same venue, but I started to second-guess my decision. How could I ever live up to my previous performance? Anything I did now in 2023 would be a letdown, it could only subtract from the impression I had made at this venue in 2022. Since there was no chance of exceeding my past performance, I felt that I only stood to lose by getting up on stage again.

What would I be losing specifically? I’d be losing the unblemished memory of my past success. Now it would be tarnished by the knowledge that I’d tried again and hadn’t done as well. Wouldn’t it be safer to take a break this year?

My experience with investing helped convince me to take the risk and get up on stage again. I realized I was trying to “save” a positive memory in the “bank” of my mind, but it wouldn’t be truly secure there. A force much like inflation would erode its value. If I kept remembering 2022 without continuing to perform, I’d find less satisfaction in the memory over time; meanwhile I’d be locking myself into a state of fear about performing again and failing. And I’d be giving up a chance to connect with an audience who was ready to hear something new from me.

The best way to claim the value of the memory of my 2022 performance was to use it as inspiration to keep performing. So I did. I got up on stage and played new music.

No one in the 2023 audience knew that I was using an investing analogy to help me go through with my song. But I told myself: security is an illusion. Your memories are not safe in the “bank.” The way to honor them and claim the value they hold is to keep taking risks, to stay in motion, to keep drawing inspiration from those memories and putting their lessons into practice.

Three lessons from investing:

  1. Risk creates the possibility of reward

  2. Repeatedly taking a short-term risk can result in a negligible long-term risk but a virtual certainty of gain

  3. A safe-seeming option might be the riskiest of all, and a risky-seeming option might be the safest in the long run

Who am I to write about investing? I’m a boring, small-time, buy-and-hold index-fund investor looking to save what I can on the path to financial independence. But I’ve been doing this for more than 20 years and I believe the lessons we can learn from being in the market don’t depend on how much money we have or how much sophisticated financial knowledge we possess. We can learn these lessons simply by exposing ourselves to risk, observing our own reactions to that risk, and watching how it all plays out in time, which I’ve had the chance to do.

See also: The Fourth Lesson From Investing ■

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