Investing truths that don’t get enough credit
When you search for the term “investing” in Google, it provides a plethora of results. While many websites provide intellectual content on investing, we believe investing only require basic principles and not full-length texts or complete website for that matter. This time, we seek to highlight some of the unknown investing truths that have not garnered much credit but are equally important as selecting investment instruments.
- The future market decline is not always a risk – An investor should ideally have a long-term horizon. An investor tends to consider the market decline in the past as an opportunity but the future market as a risk. We believe, ability to think long-term will help an investor bridge this psychological thought process. The future decline could be taken as a buying opportunity for a fundamental investor with a long-term horizon.
- Compounding makes investing magical and it is a time-consuming process – Billionaire Warren Buffet achieved over $75 billion in net-worth after 50th birthday. It is undoubtedly true that Buffet is one of the finest minds when it comes to investing but even Buffet accumulated majority of his wealth over the long term. Buffet started investing at a tender age and eventually rose to be among the top-five rich individuals in the world. In simple words, an investor can achieve a great result in few years but stellar growth is only seen when you remain invested for a really long time such as multiple decades.
- Investing is more of psychology and temperament and less of numbers – Ironical isn’t it? While basic understanding may help you zero down on an investment, it is psychology and temperament that provides an investor with the ability to keep cool during downturns. Finalizing an investment remains competitive given the number of investors in the market but it is the behavioral side particularly patience and impulse control that helps an investor win over a competitor.
- There is nothing called perfect investment – All asset class such as stocks, bonds, gold, real estate, etc. have witnessed a volatile period. Each of the asset class carries some degree of risk associated with itself and there is nothing called perfect investment opportunity. We believe diversification, optimism, and patience are key to success for an investor.
- Key to financial success is “save more money” – Saving more money is not an easy task and requires sacrifice. But it’s one of the most important requirements and can be considered as the raw material that derives the magic of compounding.
- Aim to meet goals and not maximize returns – An investor can surely afford not be a great investor but he/she can never afford to be a bad investor. In general, investing should be aimed at earning sufficient returns to meet your goals and not maximizing returns always. This approach, to our belief, is not giving up but managing risk-return profile.
- Having a financial plan is important – We believe having a plan is more important than executing it as per the plan. Given world is dynamic and one can never predict the timing of any outcome, there is always some room for “error”. Given the fact that market returns come unplanned, long-term investors are best rewarded.
- “I don’t know” in the market doesn’t make you dumb – Predicting market movement is next to impossible. Admitting not knowing what market could do next does not make you dumb. It actually makes you in touch with the reality of the system where the two-steps-forward-one-step-back journey is driven by unforeseen and unexpected events and developments.
- There are no brownie points for temptation – In most of the fields, results are typically dependent on the amount of effort put in. But the same is not true for investing. Investing is a long-term process and follows more of a buy-and-hold strategy. Thus, any temptation of fiddling with portfolio will do no good. Excessive trading in a portfolio, with an aim to achieve faster returns, only result in poor investment returns. We believe having conviction in portfolio instruments is more important and not much meaningful change to a portfolio in many years is looked as an accomplishment.
To sum up, investing just needs basic principles and an investor should focus more on behavioral factors rather than mathematical computation always.