[Insight & Opinion] Why Should We Invest?

Maximizing After-Tax Returns: The Core of Investing
Long-Term Investing and Tax Benefits Make Pensions Stand Out
Consistency Unlocks the Power of Compounding

'Why should one invest?' There are likely to be a variety of answers to this question. Some might say it is to make money, others to ensure a comfortable retirement, or perhaps to spend money wisely. All of these are reasonable and valid responses. If we narrow the meaning considerably, the answer comes down to two requirements: preserving the value of money over the long term and maximizing after-tax returns. Even if there is a better answer, it must include these two requirements.

One of the graphs I often show at investment or pension-related seminars is the trend of money supply in Korea and the United States. The slope of the money supply graph becomes steeper over time. In simple terms, an increase in money supply means the value of money is declining. Just as the slope of the money supply graph steepens, the value of money also declines exponentially over the long term. Once you understand the correlation between money supply, inflation, and the value of money, not investing becomes unthinkable. Deposits, which are considered safe, are actually a sure way to lose money over the long term. Those who want to preserve the value of their money must invest. In this sense, investment and financial knowledge can be considered survival skills in a capitalist society.

Sir John Templeton, one of the most respected investors on Wall Street, summarized the purpose of investing simply: "It is to maximize after-tax returns." Investing comes with costs. There are transaction costs, and taxes are a significant expense as well. All of these factors reduce returns. Numerous studies have shown that most people who operate high-turnover portfolios over the short term record poor performance, and one of the main reasons is cost. Taxes are also a major cost factor. In Korea, there is no tax on capital gains from stock trading, but dividend income exceeding 20 million won is subject to comprehensive taxation. For overseas stocks, both dividend income tax and capital gains tax are applied. Perhaps the case where one pays the least tax relative to asset size is owning a single home per household.

These two requirements apply to all investments, but they are especially important in pension investing. Since pensions are meant to cover living expenses in retirement, they must yield returns that exceed the inflation rate over the long term. Additionally, pensions are currently the most tax-efficient investment vehicle available to individuals. Separate taxation is applied, and in the case of retirement pensions, if received over more than 10 years, taxes are reduced by 30 to 40 percent.

Considering the essence of investing, it makes sense to manage pensions as investments. The problem is the possibility of principal loss due to the volatility inherent in investing. This issue can be addressed in roughly three ways. The first is to extend the investment period. If you invest in the market index for about 20 years or more, the likelihood of loss is extremely low. Over 30 years, it is virtually certain that you will not incur losses.

The second way is to invest through regular contributions. This simple method works wonders by allowing you to buy stocks at lower prices during downturns. The third way is to utilize automated management systems, such as target date funds or wrap accounts, which automatically allocate assets. This is similar to leaving the driving to a chauffeur when traveling by car.

Any of these methods is fine. What matters is finding the approach that suits you and investing consistently. Investment outcomes are determined by a function of amount, duration, and rate of return. While returns may seem most important at first glance, as experienced investors know, duration is even more crucial. Consistency outperforms high returns. Consistency follows the principle of compounding. Of course, there is an obvious downside: it is tedious and not easy. As Warren Buffett's partner Charlie Munger once said, "If you understand the power of compounding and how hard it is to achieve the conditions for it, you will grasp the essence of many things."

Lee Sanggeon, Head of Mirae Asset Investment and Pension Center