Today, I’m going to share a truth about investing that some people might not like. One that might not be as obvious to people in recent years. Especially with the rapid rise value in Bitcoin, and weed stocks, and the bull market in tech stocks.
There have been a lot of stories around of investment doing very well in recent years. The so call bitcoin millionaires are one example. There are also stories of people losing everything, but you don’t hear much about them.
For people who start investing this year, or even if you’ve been investing for a while, you have to remember the sobering fact that investing won’t make you rich!
And why I say this now is that something has been bugging me recently. That is I’ve been seeing all these specific adds. Maybe it’s my browsing history that has influenced all the adds I’m getting now. I’ve been seeing a lot of ads trying to sell me guaranteed trading strategies, or that one strategy that will make me rich.
These people selling these strategies are scum!
Think about it, if these people had killer strategies- why are they trying to help you? Wouldn’t they just go to a large investment firm and make millions? The reason we see these adds is that they know there are private investors that will bite. And that is how they make their money.
They don’t help investors that are starting out, and they don’t help investors that have been at it a while. They thrive in the current environment, but at the detriment of any investor that bites. So I wanted to do a post about the one sobering fact that you need to remember when starting with investing. It won’t make you rich, at least not in the short term.
Investment is for the long term. It’s are a bridge between what you have now, your income, and what you need in the future, income for when you retire your income stream. But you can’t make wealth out of thin air.
Having a mentality that your investments will make you rich is foolish and harmful to your own financial well being. There are a few reasons why investing won’t make you rich.
You Need Money in the First Place
First off, you need money to start investing. You could make incredible investment choices, but they won’t matter if you don’t have any serious amount of money saved.
If you invest $1000 and make a 100% yearly return, that’s great. But you’ll still only have made $1000 at the end of the year. That’s doesn’t make your rich. It’s a great return alright.
You might point to individuals who have made a lot of money from investments and say- they’ve done it, why can’t I? It’s because you are looking only at the end product and not the journey.
It’s a well known that one of the core beliefs of wealth individuals success in creating long-term wealth is saving, and not key investment decisions. Following a dedicated and regular saving program is considered one of the main reasons for their wealth.
Investing doesn’t Make Anyone Rich
On average, investments don’t make anyone rich. The NZX50 has had an annual return of 7.8 over 69 years, and the US500 has had an average return of 9.8% per year for 90 years. These are pretty good returns! especially with the 3% offered from bank deposits. But it’s not going to make you rich overnight. (see a table of past returns for the NZX50 here)
Using the rule of 70, if you achieved 9.8% per year each year it would take you just over 7 years to double your money. Sure, if you invest $10,000 dollars when you are in your mid-twenties, and ignoring tax and fees, you’ll end up with around $640,000 when you retire. It will take you another 7 years to get to 1.3 million- when you are 74.
This does show you the power of investing thought. Turning $10,000 into $1,000,000. But it does take 45 years. Not over a very short period of time thought.
If you wanted to hit the milestone of $1,000,000 in a short period of time, say 10 years, with an initial investment of $10,000, you would need to earn 59% interest each and every year.
Sure you can point to investments that have had 59% yearly returns. Generally, these investments only do that for a year or so. Think of stocks for startup companies with success in the early years. But to achieve your goal you are going to have to pick high growth winning companies each and every year. And make sure that you don’t pick any losers. Not impossible, but not very achievable for the everyday investor.
You’d be foolish to assume that you are the outlier when it comes to investing. That you’d be making 59% when the rest of us will be earning around 10%.
You are a Bad Investor
Now my third point as to why investing won’t make you rich might offend some people as well. You have to realise that you might actually be a bad investor.
I mean that in the most sincere way possible. You are human, I am human. We all have human biases and subconscious weaknesses that we may not know about. These mistakes can lower our investment performance over time.
You might say that one of the biggest mistakes made is to invest in funds that have high fees, and indeed- I have made this mistake. The high fees aren’t great, but there is a bigger reason why people are bad investors.
The main mistake that is made by personal investors is investing in a growth fund is that they don’t hold the fund long enough. The reason for selling could be due to getting scared as the market dips, or needing the capital for some other expenses. Either way, selling early can really hurt your overall investment portfolio performance.
Investing is a long term process. You need to have discipline. Discipline not to short yourself and let your bias take over and sell when the market is down. Selling into a down market is generally done due to loss aversion bias. Loss aversion is where we worry about the possibility of losing more capital. And to try and minimise the loses in future we sell when the market is low.
Another bias that humans are plagued with is anchoring. Anchoring is where we have seen something happen in the past and expect the same thing to happen in the future. Think of all the bitcoin investors that are still holding because they believe that the growth bitcoin had in the past will occur again.
There are other biases humans have like following the herd. We naturally don’t want to stick our necks out and generally do the same thing as everyone else. Or
To become a good investor you need to acknowledge that you are human and have biases. And that is perfectly fine. You just need to ab aware of them and know that they might sway you to make bad decisions. I know that I have made some mistakes before, and you will probably make some mistakes too. But learn from them.
To sum up;
- Your savings rate is the most important aspect of investing
- Don’t anchor your mindset, past performance does not predict future performance
- Investing is a long term game
- Avoid Loss aversion, sell high by low.
I just want to leave you with this quote from a recent study I have found about actively managed funds. ” study shows that NZ active fund managers on aggregate do little more than holding the market portfolio, presumably generating significant costs and fees in the process. Despite funds being actively managed, these funds earn almost identical pre-cost returns to funds which passively hold the market portfolio. “
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