Before venturing to invest…
Even though we are not knowledgeable about economics and finance, we need to realise that we live in a complex world that demands us to have a minimum control of our finances, especially after having lived through times when many traditional financial services made dangerous bets.
Another truth is that we can’t completely rely on the public pension system due to humanity in general getting older and the complex situation faced by country finances.
All these circumstances plus the lack of a clear alternative for our savings caused by expansionary monetary policies, has led us to consider the idea of taking a step forward and investing part of our savings.
However, before taking that step, it is useful to know at least 5 things.
1) Experts can be mistaken
If you read financial newspapers or watch television programs about the economy and financial markets, you will often see experts that make their predictions to anticipate how the l economy or the markets will be in the next weeks.
The truth is that no one will have the time and patience to analyze all the opinions and then go back in time to evaluate those predictions and compare them with reality. There are different studies that claim that 70% of the predictions made by experts are wrong. Besides, big crises are hardly ever expected.
2) We have been programmed to be wrong
Average investors follow their feelings more than taking into account real data. We often have “positive sensations” about markets or a particular company, however, a few days or weeks later they turn out to be negative perceptions due to a market correction, but still the company hasn’t changed their initial expectations. This situation leads to the worst of the sins, buy high and sell cheap following a cycle based on opportunity and fear. Moreover, it’s a proven fact that we are conditioned by human nature and the fear of losing. This causes us to make irrational decisions that don’t let us win.
3) Not many investors are able to beat the market
Investment funds, the most common investment vehicles, are not very efficient when it comes to providing reasonable returns in accordance with their risk. There are both international and national studies that show how mutual funds are not even able to replicate the returns obtained by the index they pursue.
We’ve already seen that professional investors are not much more successful than individual investors. Individual investors usually don’t have the discipline, are easily carried away by their emotions, don’t let their own bets mature and tend to sell winning investments.
4) Average investors are not prepared to invest in stocks
The vast majority of private investors that invest through mutual funds also trade. This means they don’t give enough time for the professional manager’s investment to fructify. This same impatience becomes greater when it comes to investing in companies. An investor’s lack of control of their emotions makes them think of new opportunities that don’t really exist or about bubbles when a value is triggered. Inevitably, there’s a law in the world of investments: the greater the trading the lower the returns. To invest in companies with high competitive advantages is a very good long-term option but it often requires a lot of patience. Generally, the average investor doesn’t have the discipline needed to give an investment enough time to fructify. This investment theory is regularly accomplished over time, however, average investors expects results as soon as a value is entered. Investors easily forget that equity is profitable in the long-term, because in the short-term it is risky and volatile.
5) Time and simplicity are the best allies
After reading this article it seems like there’s no hope for individual investors, but nothing could be further from the truth. Investing can be a very lucrative activity. It all depends on understanding that there are two key factors that gives us a huge advantage. The first one is our time horizon: the longer we play with marked cards the better as it will be always on our favour. A very popular investor never tires of pointing out: “When we own part of excellent companies with excellent management teams, our investment horizon is forever.”
The second one is simplicity. Investors should be ready to analyze companies and have the patience to look at the financial statements and reports in order to select the best investment strategy. A good solution is to create efficient diversified portfolios with low cost assets. You can create a portfolio on your own or alternatively invest with us.