The secret to a sound investment

“Always bear in mind that your own resolution to succeed is more important than any other”. Abraham Lincoln

When you’ve decided to embark on the journey of investing money and you want to learn how to create an investment portfolio, just remember one very important thing. Your investment plan is truly bespoke.  Its purpose is solely devoted to just one thing, achieving your financial objectives.

When investing, there’s no mass production or one size fits all. And most certainly, there’s absolutely none of the Henry Ford “any colour you want as long as its black”, cuteness!

This is one document you certainly don’t want to copy from someone else, that’s for sure.

Unfortunately, in this world, we’re being constantly assailed by a constant stream of advertising, ‘expert’ opinion, and well-intentioned advice from friends and family members. And when we lack the knowledge we tend to default to someone else’s knowhow who may not always be an impeccable source.

Unfortunately investing money is one of those pursuits where the majority of us do lack knowledge. And it also doesn’t help that the fund’s management and advice industries preach such an aura of difficulty surrounding the investment process that we tend to either follow the crowd or just refrain from doing anything. 

For example, take the new investing ‘black’, index funds. They’re a product that has been around for ages, but it seems that over the last 10 years they’ve suddenly been elevated into the realms of investing perfection. But not only have they morphed into the ‘par excellence’ of manufactured investments they have also turned the investment process into a competitive sport, with “you can’t beat the index” being screamed from just about every “FIRE’ blogger on the net!   

building a share portfolio

But is that truly the reason for investing money; just to ensure your returns always match an index? It seems that the current crop of investors have become so entranced with the achievement of index returns that it excludes everything else. Which then makes me wonder, exactly how many of these investors actually have an investment objective? Have they created a plan that includes the use of index funds or have they just defaulted to using index funds and blindly accept whatever they get. No doubt under the guise that they are maximising their returns!

I’ve said this many times, so I guess I’ll say it again, index investments come with their own set of unique problems. But unfortunately, from the learning perspective anyway, the recent Covid19 market crash appears to be ending in a ‘V’, further reinforcing the infallibility of sticking to an index strategy. And particularly for those whose investment memories only date back to 2010!

But is this the only strategy available to an investor, let alone the best?

I read many financial blogs, and it’s extraordinary the amount of misinformation actually being peddled by many self-appointed experts out there. Now I’m not referring to the pundits or industry commentators and the like, whose opinions make up much of the ‘noise’, but rather the amateur who for some reason wants to foist their concepts onto unsuspecting readers.

I have seen some incredible claims that may have had their roots in theoretical reality, but are being regurgitated as an absolutely infallible investment strategy.  And ‘infallible’ is a very dangerous word for an investor, that’s for sure.

So if you are choosing to use index funds as the sole investment vehicle, make sure you know what actually drives indexes. Go and prove to yourself why the index always has an upward incline, and just as importantly, why it spends a long period flatlining or dropping like a stone. You really need to investigate the mechanics of what you are investing in, rather than accept the grandiose claims coming from amateurs.  

investing in shares

And make sure you understand the source of the majority of the advice is coming from. Most if not all seem to originate from the F.I.R.E. community or at least the peripherals of such. The “FIRE” movement advocates extreme saving methods in order to accumulate enough funds to retire early from the workforce, normally by their mid 30’s. And index investing is their investment of choice when doing so.

But remember, “FIRE” bloggers are not providing investment advice; rather, they are advocating a strategy of saving. And the index fund sits beautifully within that theme as they are dirt cheap and over the past 10 years have appeared to be foolproof in providing returns. Add to this that they require little or no investment knowledge and you have the perfect recipe for the extreme saver. .Quite the recipe for trouble I would have thought! 

Oddly, many of the “fire experts” will actually quote the sages of Berkshire Hathaway, Warren Buffett and Charlie Munger in order to stamp index funds with an impeccable imprimatur. However, closer inspection of the more often quoted of these quotes shows the suitability of these types of funds is for those that possess no investment knowledge! This must certainly be at odds with those taking a serious interest in their own financial future!

Here’s what Charlie Munger say’s;

By periodically investing in an index fund, for example, the know-nothing investor can actually outperform most investment professionals”.

Outperformance aside, it is the accusation of being a know-nothing investor that sits uncomfortably with me. How would you like to visit a know nothing doctor, or dentist or accountant or mechanic etc!

At the start of this post, I claimed investing money is a bespoke undertaking and allocating your hard-earned money into something just because it is best suited to a ‘know nothing’ status is absurd. Who wants to blindly invest their money, I certainly wouldn’t want too!

Here’s an example of a know-nothing investor.   This guy could be out of pocket $660k. I will leave it to you to assess where he went wrong!

So don’t fall for the hullabaloo surrounding index investing as thebe all, and end-all. There is a myriad of products out there that you can choose from all catering for different needs.  The design of your investment portfolio should be based on the careful examination and selection from these products and used because they best suit the achievement of your goal. I can guarantee that there are plenty of alternative strategies that will yield better than average performance. It just takes some learning on your behalf.

So don’t be fooled, when you are developing your own long term investment portfolio. Design it however way you like. Include in it whatever product or investment you like. Just make sure it caters for your goals and no one else’s.  Make sure you monitor its progress and continue to develop and refine it. But whatever you do, don’t follow the crowd on this one!

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