Today I’ll share with you the 7 investing truths I think everyone should be extremely aware of.
My goal is to help people in achieving better financial outcomes in life. I see so much content out there that is misleading and doesn’t really talk about the most important thing. How to do well over a lifetime, not just this or next year.
I’ll start with a quote form Benjamin Graham that really synthesizes this article and is of the utmost importance:
“The investor’s chief problem – even his worst enemy – is likely to be himself.”
Let’s start. Hold yourself steady because it might be a bumpy ride.
#1: Most People Lose Money When Investing
Take a look at the average investors’ return in comparison to all other investment classes. Why did that average investor perform so badly?
Average investors perform so badly because they do most things at the wrong time. But if we dig deeper into this you’ll see how most investors actually lose money.
Let’s assume that 100 investors started investing in 1997 with $100. Of them, one achieved returns of 20% per year, 9 achieved returns of 10% per year, while 90 achieved negative returns
The 20% per year investor turned his $100 into $3,833, the 10% investors reached $672, while the investors with negative returns would have $66 left. If I sum all of it up, the total return after 20 years is $15,821 which is about 2% per year.
If the average investor got 2% over the past 20 years, that would mean that one investor got 20% per year and 9 got negative 5%. The result is 2% per year on average. This leads to the first investing truth I want to share with you: 90% of you are going to lose money investing!
Given that we are at the late stages of the economic, debt and market cycles, be careful with how much you are investing now and in what. If you’ve invested most of your money in the last 3 years, be really careful because you show the exact characteristics of the investor that loses money.
#2: Stocks Can Go Down For 20 Years
The main mantra in financial markets is that stocks always go up. Well, that isn’t true at all. We have had 6 very long periods in the last 140 years where stocks went nowhere.
So there’s a probability—and a pretty large one at that—that we’ll see negative returns over the next 10 or even 20 years. The key is to be ready if that happens, are you?
#3: No One Knows What This World Will Look Like 10 Years From Now
If I go back to 2008 and start saying to the world that we will see negative interest rates in most of the world for the next 10 years, I would immediately be proclaimed crazy. However, that is exactly what happened. So be prepared for anything as no one knows what will happen.
#4: There Is No Such Thing As A Defensive Stock
The following infographic shows that only AAA bonds, futures trading, and gold showed positive returns from 2007 to 2009. This means that most stocks will go down and you shouldn’t look for defensive stocks in this environment.
#5: Investing Isn’t Easy, But It Can Be Done
The keys to investing success are patience and being ready to take advantage when an opportunity that fits your criteria arises.
From 2009 to 2012, I was putting everything I had in stocks. But since 2012, my orientation has changed. Fortunately, real estate prices were low in the Netherlands and I invested most of what I had there.
So it’s about doing the right thing at the right time, not doing all the wrong things at the wrong times and then nothing when the time is right.
#6: In The Long Term, Investing Is A Positive Sum Game But Get Rick Somewhere Else
Earnings are what add value to shareholders and therefore what makes investing a positive sum game – be it in the form of dividends or reinvestments. Plus, it gives some protection from inflation if you own producing assets.
So invest, but don’t expect to get rich quick. Expect it to protect your wealth. This makes things much easier.
Want to get rich? Start a business, be the best at what you do if you have a trade. Remember that Buffett got as rich as he is by managing other people’s money, not by investing his own.
#7: Invest In What You Know – Peter Lynch
There is no one-size fits all investing strategy, it has to be tailored to you personally and to what you will do in 5, 10, 20 years from now. Do one stupid thing and, BAM, it all evaporates as quickly as it came.
So stick to your circle of competence and to what you are comfortable with. If you want to risk or learn new tricks, do it with minimum capital exposure.
If something is outside your circle of competence – stick to cash.
People often forget how investing is a life time thing. So don’t rush, look around yourself, there will always be opportunities and when those show up, be ready to take them. Until then, just enjoy your life.