I would like to thank You for choosing to read this post. For some of You it will be way too generalized and obvious, but for some, who are not experts in investing, this article hopefully becomes eye-opening and explorative. Understanding the proper attitude to becoming an investor is, in my view, crutial in the future success of everyone who decides to become one.
For most people not close to the financial world the word „investor” does not often cause positive conotations. Is usually accompanied or associated with words like „speculation”, „uncertainty”, „risk”, „loss” or even „cheat”. I think that these terms are not always fair and take the deserved shine off the very word „investor”. Read on and I will try to explain to You why :).
In my humble view anyone who claims to be an investor should be proud of it! Why? Because investing is the absolute act of trust in other people and good will. An investor risks own hard-earned money to help grow businesses, indirectly gives jobs to people (by financing the business by either being a shareholder or an owner of its debt), puts warrated pressure on managements to keep maximising efficiency of a company they run, helps the companies grow, helps the capital markets function in a way they should (by bringing capital to firms and liquidity to the marketplaces) and on a macro scale (put all the investors together now) constantly grow the economy of the nation and effectively the whole world!
Thinking about being an investor this way puts the whole idea automatically in a different (and very positive) perspective, doesn’t it? 🙂 I do believe deeply that buliding the culture of investing should be every goverment’s goal. Such policies not only add value to the society by increasing financial education, but also (in long term) create enormous value for the country by building a society-wide wealth effect (the more citizens become investors, the more positive effects described in the paragraph above for the whole economy!). It effectively becomes one of the most imporant things any government should have in the priorities pipeline to put all possible efforts in creating a nation-wide culture of investing in capital markets. NOTE: I deliberately set aside politics and will not comment on political issues in this blog. As important as politics is and very often has a major impact on a country’s attitude to capital markets (or capitalism as an idea itself), I choose not to comment, as these issues are a higher level of ideological perception of the world. I leave politics to politicians and to personal judgement of every reader of this blog. This little place in the internet is meant to concentrate on investing and saving and whatever is directly connected with it. NO POLITICS here. 🙂
The best examples of how building an investing culture should be done can be found in the so called Developed Markets (or Countries), with USA being the the very top case. Actually the whole country out there was built on this positive every-one-can-be-an-investor philosophy. The world’s biggest stock exchange NYSE was founded as early as 1792, so only 16 years after T.Jefferson’s famous Declaration of Independence on 4th July 1776. Ever since USA has been the very leader of involving retail investors in the country’s growth and building the nationwide equity culture. The effects are astonishing in the long run. The retail investment market in the United States is huge. Over 50 million households (40% of total!!) are retail investors of some kind and over 50% of households have savings accounts or investment plans like 401(k)s (a 401(k) plan is the tax-qualified, defined-contribution pension account; effectively it’s a pension portfolio every citizen runs to save for retirement ). This means that close to half of the nation’s people are to some extent owners of the country’s aggregate equity (and often the world’s, as US corporations are now more worldwide than ever) and and are highly interested in this aggregate equity to be highly effective, well managed, growth-oriented and competitive. There are also other countries, which have similar policies towards investing. Among them are Netherlands, UK, Japan or Canada. Please do note that all of these countries are among world’s wealthiest and most stable (not only financially, but also politically). One should also note a constant growing number of retail investors in China over recent years. Still, I would argue that this is not yet a sign of running the policy of investors nation in China, given its capital flow controls, information control, etc. No more comments on this, as this will be talking politics and we do not want it here (see above).
Now moving on, I would like to present to every reader of this missive as many pros (but also the cons) of why becoming an investor of some kind can in the long run improve our financial, physical and emotional wellbeing. As you saw above, we have great examples of how a general attitude towards investing can make a country strong. But what if you are not from one of those countries ? Does it mean you are on a lost position? No! I repeat, in today’s world everyone having (a) access to internet (b) the will to take care of own future wealth (i.e. set aside money for investing/saving and educate) (c) the consistency in fulfilling the goals , can at least start their journey of becoming and investor. By becoming one You face the following PROS:
- You become a person actively seeing opportunieties to grow your wealth, which makes You more open-minded.
- Concentration on understanding your investments (their potential returns, their risks, they way they function, etc) forces You to be creative and dig deep into what’s happening with the world and your assets (it’s hard work! but it’s worth it!).
- Investing lets you become part of the world’s growth. Financial markets have ups and downs of course, very often severe ones, but in the long run the world is based on growth. Equity markets statistically grow 70% of the time, yielding average long term annualised real returns (adjusted for inflation) of around 6-7%. Bonds as an asset class grow even closer to 80% of the time (again in the long run of course) and yield annual real returns of around 2%. Other, more physical investable assets like collectibles or real estate statistically yield (in real terms) 2-3% and 1-2% respectively. Similar is true for gold bullion, which is considered world’s major inflation-hedge and value-carrying asset. There’s a lot of data on the internet about these averaged returns, but here you will be able to find it all in one place, if you want to have a good read on the issue.
- By becoming an investor You become more self-demanding, which makes You a better more valuable person both for yourself and others.
- Your knowledge about the surrounding world increases constantly, as an investor You know You need to keep track of things.
- If You become a consistent investor, who understands the goal of Your investments and adjusts them to Your personal risk acceptance (please see here to learn about why everyone should first assess their risk profile before starting to invest), You gain control of your actions and do not let outside factors control You. You have a clear path You follow and You increase the chances of eventual success massively.
- You employ Your savings to maximise long term returns for You and your family, instead of putting the fate of your money into the hands of others (be it advisors, bankers, asset managers or anyone else). History and common sense both tell that noone can take better care of a person’s wealth and general well-being than the person alone. Be it running own business, working for others, self development or any other activity. Same is true for investing.
- You can become an activist if You please. By owning shares of different companies, You can promote them, have impact on how they develop (by actively participating in shareholders meetings), you can have Your part in how they shape the world or raise your veto, if You think they go the wrong way (when they for instance exhaust labor, pollute environment, etc). Being an investor is not only returns, it’s also the possibility of actively influencing the world.
The are also CONS of course, but a mindful person can actually make pros out of most of them and use them as a tool to improve and develop:
- Every investment carries a certain amount of risk. Risk is a function of expected returns. Always. The higher return an asset can give, the higher risk it carries. There’s no high returns without high risk. The bottom line is to understand that rule and minimize risks by appropriate diversification, deep analysis of planned investments and adjustment of risk profile to the portfolio of investment somone runs. The last one is especially crutial. I know I repeat myself, but this really is the clue to successful investing. Noone should ever take bigger risk than he can bear. A dentist starting to collect money for retirement should never ever do it buy buying futures, options, or high yield corporate debt, and not even penny stocks. A professional investor, who has experience in portfolio management, hedging and tracks markets every day can have such instruments in his portfolio, assumed he does understand all the risk they carry and knowing he looks to run an agressive strategy, switchign positions even intraday, if needed.
- Investing bears inherent stress. Ups and downs on markets can be very harsh and dynamic in the short term. It’s thus extremely important to learn to cope with the stress and minimize it. Mitigation of stress can be done via, again, sticking to the basic rules an investor needs to have before he really starts. If You have a sensible plan, just follow it and Your returns will be much better than those of most around you. Sensible plan to me means:
(a) know Your goal (are you saving for retirement?, do You look to maximise gains on excess money You know won’t be needed in the forseeable future and You like risk?, are You looking for a safe place for the savings that You might need some time in the future to finance Your kind’s education?),
(b) adjust Your investement strategy to Your goal (goal1: retirement, savings, capital protection=> You’d possibly would want to choose a mix of land, real estate, high grade long-term sovereign bonds, small portion of high liquidity blue-chip stocks that pay regular dividends; goal2: maximisation of long term returns, but high short/mid-term risk accepted => can use high stock allocation plus some leveraged instuments; goal3: balanced growth => have some stocks in both Emerging Markets (EM) and Developed Markets (DM) balanced with a relatively big exposure to liquid bonds and some commodities; etc),
(c) consistently follow Your goal (once You started, You’ve made the 1st most important step, but clue is to withstand doubts and retain high motivation while executing the plan You once set with a clear goal at the end of it),
(d) do not let Your plan be modified in moments of stress (big short term price swings, market drawdowns, information noise, crowd thinking, temporary problems with regular income You know you will eventually overcome, etc; altering the plan can of course be justified in case of serious personal troubles, like health issues, family situation change and similar, but the changed in the plan should still be done in a thoughtful and sensible way).
- Investing can be time consuming, but the aim is to minimize the amount of time an investor needs to spend on taking care of his portfolio to as much as possible. This can be done, again and again, by adjusting the structure to its goal. Example: say I want to save money for my son’s university tuition. He will be starting higher education in 5 years time. I know I will need an X amount of money as he starts. I want this money to be invested safely over the 5 years period from now to maximally protect capital. I will split the X amount into 60 monthly instalments and use general allocation strategy for each of them (no single asset stock picking) with 75% in cheap ETFs giving exposure to high grade sovereign bonds, with short- to mid-term maturities, will ad max 10% of high dividend yielding bluechip stocks ETF and the rest will be kept in Gold ETF plus cash. Buy doing that I wont have to worry about watching single bonds or stocks, my porfotlio will be balanced, and risk of losing much value over the investment period will be relatively small. On the other hand 5 years is a period long enough for me to take advantage of potential excess gains of such a portfolio over a savings account in a bank.
As You see there is much much more in being an investor than just taking care of money. It is a very serious, responsible and demanding activity, but it eventually adds a lot more value to Your life, than just more (or less) money on Your account. I personally try to think about investing in the way described above. Over the course of years spent working in capital markets I that vast majority of people, including investing professionals, does not think this way. On one hand people who have savings earned on their hard work are either not interested or just scared to put this money to work for them, because they are afraid to lose it or they do not believe that they can sensibly invest them, given the complexity of financial world. On the other hand this kind of attitude is even enhanced by the financal services industry, which often gets involved in unfair and immoral practices like misseling (selling wrong products to inappropriate people put simply), concentration on own short-term financial results rather than people’s long-term best interest (simple example: why do most Asset Management companies and banks (their distributors) offer such an extremely wide pallette of open-ended funds for every possible market scenario, geographical and industry exposure? AMs take management fees (calculated as % of the fund’s AUM per year) for all of them. Then where is the real motivation for them to seriously take best possible care of people putting money into those funds (after being advised by their bankers)? It should be the other way round. To offer real added value to people a theoretical AM company should offer a narrow range of investment structures, which the company’s management and portfolio managers truly belive would give best returns to people who accept certain risk profile. At best they should be invested in these fund’s certificates themselves with their private money. Banks should not distribute just the AMs that pay best kick-backs, but the ones that have long history of beating both competition and benchmarks (it’s especially hard to find the ones beating their benchmarks).
The bottom line is that, unfortunate as it is, the interests of investors (understood as people who posess investable assets and are willing to put their money to work) and most of the financial sector participants, who to much extent control distribution of this money, are not crossing in most cases. An investor wants best care over his assets, a bank wants cheap deposits or high distribution fees for putting people’s moeny into mutual funds, an asset manager wants maximum AUM (Assets Under Management) to have highest possible base for management fee calculation.
At end of day the options every person looking to responsibly take care of own money has are:
a) accept the situation described above we’re all facing in today’s world —> don’t think that’s what I would ever want to choose,
b) find a partner who will truely be interested in taking care of your investments (offers you a product really suitable for you in terms of risk-return profile, understands your goals, risks his reputation and own money (read: is just as motivated as you), doesn’t rip you off with absurd fees for being ineffective (for instance doesn’t charge any management fee in case of not beating benchmark or at least inflation), can maximize probability of future effectiveness (still can’t ever guarantee it of course) by showing exceptional historical results. —> this option may be hard to access with people who do not posess bigger wealth, eligible for such extraordinary quality service,
c) become an INVESTOR!, educate yourself, put effort in having your stuff under own control, choose wisely, become smart, don’t blame others, blame yourself, pick what’s best for You and not best for those who sell You anything, learn not to practice horde thinking, but to be an independent thinker, set your goals and bravely follow them!
That’s what being an investor means to me :). I invite every single one of You, who made it to the end of this article (ufff), to make the first step and become independent.
To continue exploring on my being-an-investor philosophy, please see my post about the Smart Investing Approach (SIA) It is my personal method I have worked on for years, while looking to make investing as effective and suitable for myself as possible. It’s actually just a set of my conclusions and thoughts after over 20 years now of being an investor of some kind. To be clear, I have made A LOT of mistakes throughout the years and I am constantly making them still now (investing is a constant process of learning and adopting to new conditions). SIA was (is still being) built to help myself (and hopefully others in the future) to follow my own path in the area of investing, personal finance and savings. Also, SIA is a developing philosophy and I am not saying it’s perfect and good for everyone. I do believe though, that by implementing SIA one can get a better grip on own financial life. It has increasingly been helping me personally over recent years, as I was slowly building it.
Good luck all of you! Stay safe, stay independent! 🙂
Disclaimers: None of the ideas, views and thoughts presented here shall ever be taken as a recommendation to buy or sell stocks,bonds,FX,commodities or any other financial instruments as stated in REGULATION (EU) No 596/2014 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 16 April 2014 on market abuse (market abuse regulation) and repealing Directive 2003/6/EC of the European Parliament and of the Council and Commission Directives 2003/124/EC, 2003/125/EC and 2004/72/EC or the Polish Act of 10 February 2017 amending the act on trading in financial instruments and some other acts. The article is for educational reasons and purely presents private views of the author, thus the author shall not be held accountable for any losses of a third party resulting from any potential trading activities in any instruments, both specifically or by category of assets. The author uses his best knowledge and data from sources believed to be reliable, but makes no representations as to the accuracy of the data.Full Disclaimers&Liability Limitations page.