Some harsh realities of investing
Disclaimer: What you are about to read is purely based on opinion and not 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 investors dream to wealth. Unfortunately, it’s just a dream and not reality for most people.
Investing is not the key to wealth
My favourite 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 the 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 sales person?
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?