I find it very intriguing when people ask me about investing and their first question is “How much will I make?”
It will be wonderful to give them an answer, but reality is nobody knows. Investments are not certain. In fact, those who had given great returns, could in a different scenario, give very bad returns.
Does this mean investing is a “game”? No, it is not.
They are certain rules to follow to make good investments
One of these rules is “Don’t lose big”
LOSSES ARE HARD TO MAKE UP.
Investors who expose themselves to significant losses require a much higher return to get back to even and may not have the flexibility to invest at the most opportune moments.
The chart below tells you how long will it take you to recover from a loss.
Let’s look at the first row. If you lose 10%, to recover your initial investment in a year, you should make in that year a return of 13%.
Now, let’s see what happens if you lose 20%. To recover your initial investment in one year, you should make 28%. And it becomes worst and worst.
We must consider the risk factor.
Those investments that offer you big returns have a risk associated with them. The higher the return, the higher the risk. Risk could be measured in many ways, perhaps the most common one is the standard deviation
I am not going to explain the formula (go to the link for that). In a “blissful way” what a standard deviation gives you is a range. If an investment can give you a return of 10%, it could also lose 10%. That is the range -10% to +10%
You should invest with a margin of safety.
By this I mean, invest in attractively priced assets that offer fundamental value and provide a margin of safety. We will talk about value investments in a future post.
And never forget you should SPEND WISELY or “blissfully”
Prudently manage fees and taxes but with the understanding that paying less is not always better.
Investment is no game, so before you start doing it, get informed. Read, ask questions, and know the person in charge of your investments. Read our previous post on how to choose the right investment advisor.
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