Some harsh realities of investing
Disclaimer: What you are about to read is purely based on opinion and not the fact
It seems everywhere I go, the topic of investing comes up. When people find out about what I do, it is automatically assumed that what I do is help people strike it rich by finding investments that make tones of money with little to no risk. People always want to know my thoughts on the market or my view of a particular stock or strategy and people want to know what I am doing with my investments to try and get ahead.
Investments with high returns with low risk do not exist.
One of the universal truths of investing is there is a relationship between risk and return. Generally speaking, if you want higher returns, you have to take some level of risk. If you don’t want to take risks, then you have to settle for lower returns. If this relationship did not exist, then investing would be pretty simple.
Related article: Do risk-free investments really exist?
This being said, I can think of periods of time where the relationship between risk and return was different. One example is 1981 at the peak of interest rates. You could invest in safe, conservative GICs and get 12% to 18% interest with no risk (volatility). It was a pretty safe bet that you could get high returns with low risk but those days are long gone and low-interest rates are our current economic reality.
You cannot predict the future of the markets with any degree of accuracy.
The entire investment industry is built on the premise that someone can predict the future. Really smart people are always trying to guess what the next winning stock, sector, or market is going to be.
The entire industry is spewing out useless predictions on whether current trends will continue or turn on a dime:
- “I think it will take years before Europe get back on their feet”
- “Since Obama has been re-elected, pull all your money out of the US.”
- “Don’t bet against demographics! The health care sector is the place to invest.”
- “You got to think that the price of oil has nowhere to go but up.”
- “You can never lose money investing in land because they are not making any more of it”
I could go on and on with predictions of why something is going up or down and sometimes you’ll be right but I guarantee no one is right all the time. In fact, I don’t think people can be right as often as people think they can be right all the time.
Just like playing in the NHL is the Canadian dream for any hockey player, being able to predict the future of any investment is the investor’s dream to wealth. Unfortunately, it’s just a dream and not a reality for most people.
Investing is not the key to wealth
My favorite harsh reality is the idea that investing is the key to wealth. I hate to break it to you but it’s not! Your savings rate is the key to wealth. Think about it . . . anyone who has money to invest had to save it in the first place.
Who would you bet on?
If you were trying to pick the person who would have more money in the future, would you bet on Sally Saver who saves 25% of her income every year but invests it all in boring low return GICs? Or would you bet on Iggy the investor who has $500 to invest trying to find the best investment around?
I’ll put my bets on Sally any day of the week. I’ve been very fortunate to meet the Sallys and the Iggys and time and time again, it’s Sally’s that have more wealth. They focus on things they can control like their ability to save over things they can’t control like the stock markets.
If you have doubts, try this exercise . . . take a look at your investment statement and figure out how much of your money is capital that you invested versus growth from investments. My guess is that for most of you that can actually figure it out, the majority of your investment portfolio is your own money that you saved and put away.
For those of you that have more growth than capital, good for you. I applaud you but know that you are the minority and not the majority.
Focus on financial planning, not investment planning
At the end of the day, the majority of the financial industry is focused on the wrong things. Most financial advisors and institutions focus on investing and investments because that’s how they really get paid. It’s not just their fault, most clients also believe that good advisors can pick superior investments or know when to get in and out of the markets.
Related article: Financial advisor or salesperson?
When people ask what I do with my portfolio, I tell them my strategy is simple and boring. I keep a strategically diversified portfolio based on science. I prefer to buy low-cost passive investments and I rebalance from time to time. I spend very little time monitoring my portfolio and I don’t make changes based on any investment predictions or economic theories.
When people ask where my wealth came from, I tell them it comes from the same place all other wealth comes from . . . working hard, spending less than I earn and saving some of the money I make consistently. It’s your savings rate that creates wealth and (jokingly) investing that often destroys it.
Unfortunately for some, the joke is not a joke but another harsh reality. Don’t get me wrong, being a good investor can help you get ahead but I think too many people are hoping it’s the key to getting ahead.
What do you think? Am I being too harsh? Are there other harsh realities you believe about investing?
Nice article, now every time i look at my portfolio and its “dramatic”decrease in value ill feel better. Thank god i still save more then invest! Keep up the good work!!
Thanks Mitch! Great to hear from you here at RetireHappy.
Keep on saving!
A friend asked my advice on getting into ‘simple day trading’ to try get more out of his investments. I told him that increasing his savings rate was a much better strategy.
Think about it – even if you like to dabble in penny stocks or day trading and you manage to double your investment, unless you had huge sums of money invested it’s not really going to make much difference ($1k doubled to $2k or even $10k doubled to $20k).
It’s not exactly lotto winnings, and you take a huge risk to get there. Better to keep increasing your savings rate and your investment portfolio will grow much faster.
No I don’t think you are being harsh at all. I think the one’s that get lucky simply get lucky like winning the lottery. I seem to always lose my crystal ball and likely for good reason because I don’t care who you are unless you are Marty McFly and Doc Brown I’m betting you don’t know what will happen. Risk is risk no matter what way you look at it. I’m now looking at what I should do with our money since we have enough to pay off our mortgage. I will for sure max my TFSA which I have the room from past years but not sure what to do when it comes to ramping up my investments. I don’t mind risk, but I also don’t mind being a Sally Saver but in a macho way ha! Great Post mate.
“At the end of the day, the majority of the financial industry is focused on the wrong things.”
On the contrary, most financial institutions are focused on the right things, products and services that make them money, as should all businesses. The problem is, most investors don’t understand it’s the primary objective of these organizations to make money and profits, and if that means off you, Mr. or Mrs. Unknowing Investor – then so be it.
As more Canadians take financial matters into their own hands, the better off we’ll all be.
You’re not being harsh at all…good post 🙂
Great post! Many try to be an Iggy, until they learn (or hopefully they do) that Sally is the often the smarter one. Classic turtle beats the hare. When I first started investing, I used to be an Iggy. It was exciting for a while, when just a handful of years ago, every stock you threw a dart at, was a winner. Yes I made a lot, but I lost almost as much. Luckily I got out in time and learned from it. It’s taught me a lot. I’m all for Sally now.
I don’t think you are being harsh. Your savings rate is even more important than the return..and the risk you are able to take based on your investment time horizon.
I am sure you have heard people say “I am investing in gold.” I hope they remain diversified.
Great article and I completely agree with you and I’m pretty sure that my financial advisor would too as he gave me the same lecture last year when I was trying to get higher returns.
I very much enjoy your articles. Keep up the good work.