Investing is a learned skills. No one is born with the knowledge of how to invest, or how to properly handle money. Without proper learned financial skills poor spending and investing habits take over leading to a life of perpetual working and little excess money for enjoyment.
When your car needs service do you handle the service or do you take it to a mechanic? If your home needs electrical work do you handle it or do you call an electrician? Most of us would answer that we take our cars to a mechanic and would also call an electrician. Even if we are capable of handling the car service or electrical work we often to don’t have the time to properly commit to getting it done.
Proper investing is much like the mechanic and electrician examples above. It is incredibly easy today to open an investment account and make investments on our own. Yet, like the car and home examples good investing takes time and research. If you commit the time and research you can be successful. Like anything else the amount of work put in can be directly relevant to the rewards.
Malcolm Gladwell in his best seller “Outliers” infers that it takes 10,000 hours to master something. Ten thousand hours broken down into approximately 2,000 hours per year (full time work) equals five years. This is a big commitment of your time to master something.
The investment business attracts some of the smartest and wisest people in the world, since investment work challenges people’s minds and emotions against themselves. Successful investing involves the investigation and locating of a potential investment, yet stepping into the investment involves battling your own personal emotions of greed and fear to move forward.
Understanding yourself and your strengths and limitations when it comes to money can take a lifetime. Ten thousand hours or five years within the investing arena is infancy especially when it comes to taking what may seem to be big risks. The bigger the risk the bigger the reward applies to investing the same as any other field.
Many experts, such as Warren Buffett, exclaim that if you don’t have the time to commit to a proper investment education, then you should be minimally invested in the indexes. Indexes, on average, can have a waterline or base return around seven percent over the long term.
Investing with a seven percent annualized return will average out to a double of your funds invested every ten years. So if you start in your forties this means you will get two doubles by the age of sixty. If you start with one hundred thousand dollars at the age of forty, as an example, it would grow to around four hundred thousand dollars by the age of sixty (if you don’t touch it before the age of sixty).
If you are able to average at least ten percent per year returns, and using the same one hundred thousand dollar starting point as above, you would have around seven hundred thousand dollars by the age of sixty. A three hundred thousand more dollar difference versus a seven percent per year return.
Human emotions and biases such as greed, overconfidence, avoidance, restraint, loss aversion, framing, attention, and fear are strong opponents when it comes to finances and investing. In fact, there are over an estimated one hundred and seventeen human biases that people have to contend with when making choices for improved investment returns. Humans aren’t built for dealing with finances and investing emotionally.
Human behavior is generally irrational, and irrational behavior and money are a poor combination. One of the best ways to reduce poor behavior is through education or to have a team. A team could be an investment club, friends with common goals, or a financial advisor. In fact, statistical research has shown that having an advisor on your team can improve investment returns.
The media bombards investors daily with different investment topics, ideas, and methods. Yet, there are only a few investment methods that are backed up by documented evidenced based investment returns over the long term. Research has shown that the most successful professional investors tend to use the value investing model as a core for choosing their investments. The great thing about value investing is that the core of it can be applied to varying investment methods as a hybrid.
Make Your Money Work
It’s your money, and you worked hard for it. Learn to make good decisions and it will improve your investment returns and make your money work for you rather than you having to work for your money. If you are just getting started check out “7 Skillful Steps for Investing Beginners” for some simple first steps.