Forbes magazine said that the concept of “making money working for your favor” has become common among individuals who seek to build their wealth, but it may be misleading if it is not understood correctly.
The Forbes report sheds light on the different methods that money can perform, explaining that the transition from liquidity to investments involves fundamental changes in the risks and possible returns.
What is the meaning of “making money working”?
Forbes explains that there are 3 main dimensions for how to use money effectively:
- Wise use of money: through good management of expenses and savings.
- Income maximization: by achieving the highest returns from different income sources.
- Investment: By converting money into financial assets such as bonds and shares.
Despite the importance of all these factors, the article indicates that the term “making money works” is often associated with investment, which is the field that carries the most risk compared to maintaining cash liquidity.
The difference between liquidity and investments
Money is defined as an exchange, a store of value, and an account unit. But once money is transferred from cash to investments, the differences begin to appear:
- Criticism is the most liquid and stability assets: it can be used directly at any time.
- Bank accounts are close to cash, but they are less liquid: they are loans that banks offer to account owners, with limited guarantees from the government.
- CDS is less flexible: imposes restrictions on early clouds and may carry financial penalties.
- The bonds require liquefaction before use: they can rise or decrease their value according to interest rates.
- The stocks are more volatile assets: they reflect companies’ performance and are subject to market factors.
Forbes warns that dealing with stocks and bonds as if they are money can be a common mistake, because their value is not fixed and can be subject to great fluctuations, which may lead to unexpected losses for investors.
Risks associated with investments
One of the biggest mistakes that investors make is that they assume that the invested funds will return to their original value, whatever the poor performance of the market. Forbes offers several examples of investors who have fallen into this trap:
- A person invested $ 100,000 in stocks, then the value decreased to 75 thousand dollars, but he is still convinced that it will return to its previous value.
- Another investing 100 thousand dollars, and the value rose to 125 thousand dollars, but later declined to 105 thousand dollars, yet it is believed that the price will rise again.
The article indicates that such assumptions may lead to non -rational decisions, as investors assume that the investing money is immune to loss, while the reality is completely different.
How should the investments be dealt with?
Forbes recommend investors to change their way of thinking about their investments, and avoid using the term “making money” because it may be misleading. Instead, you recommend the following:
- The awareness that investments involve risks, and not just another form of keeping money.
- Translating any talk about “making money working” into “buying financial assets that involve risks”, and this reflects the reality more accurately.
- Understanding the nature of each investment tool: bonds have credit risk, stocks are subject to market fluctuations, and real estate may be affected by broader economic conditions.
- Keep realistic expectations about returns and not to assume that any decrease in the market is temporary.
Why is critical thinking about investments necessary?
Forbes explains that many people confuse liquidity and investment due to the use of the dollar as an account unit, and this makes them see all the assets from a perspective of its cash value only. This may lead to excessive confidence in the stability of the markets, while financial markets are nothing but a reflection of the expectations of supply and demand, and not a fixed value of money.
Consequently, the correct way to manage money requires understanding the nature of the various financial assets, distinguishing between money and investments, and developing investment strategies that take into account the real risks of the market.
