There are couple of reasons why I thought I should write about investment.
1. Most people are scared to invest.
2. People think it is very complex to do on their own.
3. Human behavior is very volatile which greatly affects their decision making.
Actually, Investing is one of the simplest task to do, if you know how to do it.
Below four topics will help you to understand better investment.
1. Investment Theory:
Let’s talk about major asset classes.
Stock Market : A stock is a type of investment where you own a share of the company. If you hold a stock from any company, you are basically investing in that company for its future earnings and dividends.
Some people will invest in individual stocks and some will invest in Stock market through Index fund.
Stocks are considered as high risk and high reward component.
Bond Market: It is a fixed income type investment where you basically loan the money to government or corporate. Each month you will receive an interest on your principle. Bond has a maturity date which can be classified based upon the duration as ( short, intermediate and long).
Since bonds are for fixed income, it is not tax efficient. For people who are in high tax rate then municipal bonds would help where you don’t have to pay tax on interest.
Since bonds are tied up with the interest rate, it is often less risky than stock , so the return will be less when compared to stocks.
Others: I would classify other investment in others category
a. Precious Metal
b.REIT
c. Energy
2. Investment History:
Everyone should know the history of investment, because this will help to better understand the whole investment lifecycle.
There is a saying “ History always repeats” , Even if does not happen exactly as same, you can sense its pattern.
I’m not going to go back to all the instances, two instances stand out for me.
DOT COM bubble. During the early period of the internet evolution in early 2000’s. All the internet-based company was overvalued as people were expecting higher return from them.
When these companies were unable to generate revenue consistently then people panicked and pulled out of stock market which caused the stock market to crash.
Reversion to mean : Anything which goes higher has to come down.
Bitcoin : There was a craze in late 2017 with the cryptocurrency where people were trading based upon pure speculation.
People were buying the coin assuming the other person would pay even higher price for the same coin. This turned out to be another crash because it did not have any intrinsic value associated with it.
We should not expect high return without high risk.
3. Human Behavior:
You are your worst enemy.
As humans always look for the short-term safety than looking for long term return, we tend to make lot of costly mistakes.
During the accumulation phase, we should all look for the crash so that we can get the stocks for a cheaper price.
Crash or any downturn would be a best time to buy an undervalued asset class.
Accumulation phase – Pray for crash
Spending Phase ( Later in your life) – Pray for Bull market
Few quotes from great people
“Far more money has been lost by investors trying to anticipate corrections, than lost in the corrections themselves.” - Peter Lynch
“The stock market is a device to transfer money from the impatient to the patient.” – Warren Buffett
“A lot of people with high IQs are terrible investors because they’ve got terrible temperaments. You need to keep raw, irrational emotion under control.” – Charlie Munger
“The investor’s chief problem—and his worst enemy—is likely to be himself. In the end, how your investments behave is much less important than how you behave.” - Benjamin Graham
4. Investment Business:
Every company is there for business, so their objective is first to look after themselves.
It could be stock broker company or a mutual fund company, their objective is to sell you their products.
When a stock broker sends you an email with a list of stock or educating you on how to trade. It is not for you; it is for them. If you trade often then you will be doing business with them and making them rich.
99% of what you read about investing in magazines or newspaper and 100% what is hear from television is worse than worthless.
Final thoughts:
We have lot of distractions in this investing world, once we understand all these aspects, it would be easier for us to stay on course during troubled time.
As Jack Bogle says “ Implement the investing plan and Stay on course”
Thanks for reading!!