The 3 Key Things to Keep in Mind When Investing
If you want to live a comfortable retirement, pay for your children’s college tuition, buy a vacation house, or enjoy any of the other creature comforts that many people today have come to expect, you have to invest your money. Chances are that you’re not going to work till you die, so you can’t expect to fund your lifestyle solely through your work income. That’s why it’s more important than ever to pick the right investments to grow your nest egg. And in order to do that you have to keep three very important things in mind.
1. The Future Is Uncertain
It would be nice if we had a crystal ball that we could consult about all of our investing decisions. We could ask it whether Stock ABC or Stock XYZ would be the next Microsoft or Apple. We could find out what the next stock to make 12,000,000% returns will be. We could figure out when to buy gold, oil, or real estate, and when to sell. We could even ask it about what the next great cryptocurrency will be. But that’s not possible.
The future is unknown and uncertain. Like the famous truism, the only things certain about the future are that we will eventually die and that we will have to pay taxes. Everything else is up in the air. But it’s because of that uncertainty that many investors are able to make great gains.
If you play things safe, you can make returns on your investments, but greater returns can often be gained by sticking your neck out and taking a risk that others won’t. That’s why lower-rated bonds have higher yields than higher-rated bonds, because the increased risk is compensated for by higher interest payments. Similarly, longer-dated bonds pay more than shorter-term bonds because of the extra risk of default inherent in a longer investment term. The same principles apply across many other asset classes.
If you’re content to stick with the pack and do the same things and make the same investments that everyone else does, you can expect to get the same results as everyone else. But if you want to pull away from the pack, you’ll want to make choices that everyone else doesn’t.
2. Investment Choices Reflect Your Views About the Future
Your choice of investments, both the types of investments you choose to invest in and the particular allocation at any given point in time, are a reflection of your views about the future. While past performance is always looked at as an indicator of future performance, it isn’t always an accurate predictor of the future.
For every solid, dividend-paying blue chip stock that has been around for decades there are thousands of others that haven’t performed nearly as well, or that have even fallen by the wayside. Looking backward can give some clues about the future, but when things start to change and investment paradigms are upended, it requires clear and careful thought about what the future might hold in order to be successful at investing.
If someone had advised a customer 20 years ago to invest in gold, he likely would have been laughed at by other investment advisers. Gold at the time was trading at less than $300 per ounce, over $100 less than it had been worth just three years prior. Gold was worth less than half of what it had been even in the early 1980s, while stocks had increased tenfold since then. If you had looked backward to make your investment choices, you would have chosen stocks for sure.
But it you had chosen to invest in gold, you would have made an average annualized return of over 7.5% since then, versus an average return of about 5% in stock markets. Your gold holdings would have more than quadrupled in value, and you would have been laughing all the way to the bank. But why would you have bought gold in that type of market?
You might have foreseen the coming burst of the dotcom bubble, or you might have judged that central banks would no longer be able to keep the price of gold down through gold sales or leases. Whatever the reasons, you would have had to know and understand markets, foresee the future, and take a calculated risk. Those who do that, who see the future as it will be and not how they wish it to be, will reap the rewards.
3. You Have to Be Willing to Take a Loss
No investment is without risk. For nearly two decades from the early 1980s to the early 2000s investors were accustomed to nearly continuous gains in stock markets. Even Black Monday in 1987 was only a speed bump on the road to greater and greater growth. But the bursting of the dotcom bubble and then the collapse of the housing bubble have meant that the last 18 years haven’t seen nearly the same growth as the previous 18 years. After more than tenfold growth from 1982-2000, the past 18 years have seen stock markets only about double. And while any growth is better than no growth, the ups and downs have many investors understandably fearful about losing money in the markets. After all, stock markets lost over 50% of their value during the financial crisis.
But that’s the nature of taking a risk. You have to take a risk in order to earn a reward. Sometimes that means you’re going to lose money. It’s up to you then whether you want to continue riding that investment down until it rebounds or whether you think there’s no recovery and you want to cut your losses.
Of course the worst part of investing is that by not investing you’re guaranteed to lose money. Not in nominal terms, perhaps, but in real terms. That’s because inflation will slowly but surely eat away at the purchasing power of your money. Even at a “low” inflation rate of 2% per year, the target that the Federal Reserve and most major central banks shoot for, that means a quadrupling or quintupling of prices over the lifetime of the average American. And that’s where gold can play an even more crucial role.
For centuries, investors have trusted gold as a safe haven asset during times of financial upheaval. Gold defends wealth and protects assets against inflation better than any other commodity. With investment vehicles such as gold IRAs, investors can even invest in gold while still enjoying the same tax advantages as traditional IRA investments. Given gold’s performance over the past two decades and its ability to continue to grow in value when stock markets decline, there’s no better asset to invest in if you want to protect your hard-earned nest egg.