This is part of a week-long series about Social Security. If you want to read the whole series, links are provided at the bottom of this post.
When we set aside money now to fund our retirements later, we call that investing. Frankly, though, most of what we’re doing is gambling with pretty good odds, not investing. To understand what I mean, you have to know a bit about stock markets.
The original stock markets were mostly set up to fund colonization. (What follows here is some gross generalization.) A trip across the world in a fleet of ships, the locating and setting up of mining operations, the consolidation of local fruit markets to siphon off some of the product for export, the fending off of competing countries’ interests–all those things take time. They all take money. That means they all required funding that could be tied up for a length of time with an uncertain outcome.
There aren’t a lot of individuals who are willing to fund that kind of project in toto or with just a few investors. This kind of colonization was done in a world shifting from a feudal system to a mercantile system, which meant that royalty was often broke, even more so than previously. There hadn’t been much consolidation of mercantile interests at that point; monopoly was rightly seen as a source of power that monarchies were wary of. Companies that wanted to exploit colonies had a limited number of choices for funding that exploitation.
Rather than giving the whole thing up as the bad business it was, companies found a new way to find funding. They crowdsourced it. They received a small amount of funding from each of many sources, granting each a small interest in the company. Markets were set up to handle the trade between investor and company.
Almost concurrently with the transactions between investor and company came transactions between investors. Because this funding was long-term in nature, some investors found that they couldn’t spare their investment funds for as long as they had expected to. They had to recoop at least some of their funds by selling their interest to someone else.
This type of trade then led, also very quickly, to a third type of trading. This type involved creating various types of financial agreements that people could use to hedge their bets or make new bets on how much return the original stock would produce. These days, we refer to this kind of trade as “derivatives”.
Again, this is all very simplified, but that gives you an overview of the structure of the financial markets in which our retirement funds are put to grow.
All of this activity is referred to as “investing”. However, when we talk about the virtues of investing, it is generally only that first kind of trade we’re talking about. Continue reading “Social Security: We Aren't Investing”