A cautionary tale

Posted on 17 January 2011

With a bigger appetite for risk comes a higher possibility of failure.

By Alex Lew

Photo credit: reason.com

THE banking and investment careers are the aspirations of numerous young adults. Why so? I suspect it has to do with the promise of wealth and the opportunity to learn about investments.

Regardless of one’s personality, lifestyle, background or interests, investing is certainly an intriguing topic. Let’s start by discussing the dictionary definition of the root word “Invest”.

It says, “To put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value.”

To invest, one needs to commit time and money into an instrument that will either appreciate in value or return an amount to the investor.

An investor should expect to sacrifice current consumption for a greater amount of return in time. The longer the period of time, the greater the sacrifice and therefore, the greater the expected return. All investors should be entitled to such expectations.

This opposes the claim by speculators and gamblers that they are able to generate a return without reasonable sacrifice of time or capital.

Often, we see “get-rich-quick” schemes on newspapers and on the Internet. They seem to suggest that there are ways for an individual to generate super returns within a short time with little capital committed.

However, only 4% of diversified US stock mutual funds have beaten the performance of the S&P500 index over the past 10 years.

If professionals cannot beat the market consistently over a significant period of time, why would young investors think they realistically can?

Let’s return to the basics of prudent investing. It all starts with savings and watching out for one’s consumption pattern. If one saves a significant amount of the gross income and invest into a diversified fund or a low cost exchange traded fund, the returns over one’s entire adulthood can be amazing.

If one saves $500 per month over 30 years and commit the money into a market replicating fund which generates 6% over 30 years, the individual would have close to $3 million!

Am I discouraging investing in single stock? Definitely not! My intention was to show the importance of investing consistently with a reasonable basis.

Photo credit: perculaclown.net

What is reasonable basis? Let me explain. Returns are unpredictable. All we know is that the market grows at a certain rate and the rate becomes more consistent the longer the time period. What we can control is the cost/expense of our investment and the level of diversification of our portfolio.

So, there is absolutely nothing wrong if you trade with a low cost broker and diversify your risks prudently – globally and across sectors and instruments.

A tip: young adults should be slow to action, patient in understanding and quick to listen and read.

Finally, the concept to investing may be applied not only to money, but to education, emotional stability and relationships. If you commit time and effort to studying and maintaining healthy friendships, the returns will likely be greater satisfaction!

Alex Lew is not a professional financial advisor. Readers should take advice from a qualified F.A before purchasing any instruments.

www.alexlew.co.nr

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  • Landon Leo

    Very very good article. Short sweet, but extremely important for all young investors!