Capitalism 101: If you put skilled labor, natural resources, intellectual capital and financial capital into a free market economy, wealth will be created in that market. Investing is when you provide a portion of the financial capital to the market and get your fair share of wealth creation. The overall return is called the capital market rate of return.
You deserve the market return and a good advisor (or your own self-discipline) should be able to provide it by coaching you to not make the following two mistakes:
• Lack of discipline.
• Lack of diversification.
If you avoid these two mistakes you will get the capital market rate of return, and guess what, not many get it even though it is right in front of them!
The most common mistakes involving lack of discipline are market-timing and performance-chasing.
Timing the market, no matter if you are using funds or individual stocks, is extremely difficult to do.
Each time it involves two correct decisions (or guesses): when to exit and when to re-enter. It makes for a lot of sleepless nights in between.
Only in hindsight, weeks and months later, can we confirm a market peak or valley. When people bail out of the market, usually 30-40 percent of the next bull market has already passed before they re-enter. Often the market recovers when the economy is still very gloomy, so people don't believe it really is the start of the next bull market.
Stay disciplined and stay invested.
Another typical discipline problem involves chasing performance.
When Peter Lynch's Magellan Fund was averaging 15 percent return per year in 1990s, the average owner of the fund during that time was only getting 5 percent. How could that be? It's because people would jump in after reading about 30 percent returns, experience average returns when expecting big performance, became disillusioned and withdrew their funds.
Investors may try one advisor after another seeking someone that will satisfy their expected returns. Sadly, many spend a lifetime chasing performance seeking that "home run."
Diversification
A wise economics professor once said: "Your only free lunch in investing is diversification; eat as much free lunch as you can!"
Diversification reduces risk (lowers volatility) while not sacrificing long-term return. Your return comes from being in the market. For the average person, owning individual stocks is speculation, not investing. At best, it is investing with an unnecessarily high risk.
Warren Buffett said, "An average investor with $1 million should put it in a low expense ratio index fund." Buffett is one of the most prolific investors in the world, including placing bets on individual companies, and he says to be diversified.
Many people treat their own money with disrespect. Consider that you "are your own fiduciary," make your money management decisions wisely with a long-term view and avoid these common mistakes. Stay disciplined and diversified!
You deserve the market return and a good advisor (or your own self-discipline) should be able to provide it by coaching you to not make the following two mistakes:
• Lack of discipline.
• Lack of diversification.
If you avoid these two mistakes you will get the capital market rate of return, and guess what, not many get it even though it is right in front of them!
The most common mistakes involving lack of discipline are market-timing and performance-chasing.
Timing the market, no matter if you are using funds or individual stocks, is extremely difficult to do.
Each time it involves two correct decisions (or guesses): when to exit and when to re-enter. It makes for a lot of sleepless nights in between.
Only in hindsight, weeks and months later, can we confirm a market peak or valley. When people bail out of the market, usually 30-40 percent of the next bull market has already passed before they re-enter. Often the market recovers when the economy is still very gloomy, so people don't believe it really is the start of the next bull market.
Stay disciplined and stay invested.
Another typical discipline problem involves chasing performance.
When Peter Lynch's Magellan Fund was averaging 15 percent return per year in 1990s, the average owner of the fund during that time was only getting 5 percent. How could that be? It's because people would jump in after reading about 30 percent returns, experience average returns when expecting big performance, became disillusioned and withdrew their funds.
Investors may try one advisor after another seeking someone that will satisfy their expected returns. Sadly, many spend a lifetime chasing performance seeking that "home run."
Diversification
A wise economics professor once said: "Your only free lunch in investing is diversification; eat as much free lunch as you can!"
Diversification reduces risk (lowers volatility) while not sacrificing long-term return. Your return comes from being in the market. For the average person, owning individual stocks is speculation, not investing. At best, it is investing with an unnecessarily high risk.
Warren Buffett said, "An average investor with $1 million should put it in a low expense ratio index fund." Buffett is one of the most prolific investors in the world, including placing bets on individual companies, and he says to be diversified.
Many people treat their own money with disrespect. Consider that you "are your own fiduciary," make your money management decisions wisely with a long-term view and avoid these common mistakes. Stay disciplined and diversified!