Sounds like a no brainer right? Who doesn’t need better investments?
Obviously we all want the highest returns possible. Investing is a crucial step in preparing for retirement or financial freedom of some kind.
However, investment that is not properly executed can be a disaster, even life changing depending on what you put at stake.
Why do you need better investments?
The reasons stated below apply to a massive amount of people in the markets. Let’s dissect each one…
Our financial system has coined terms such as “high-interest” savings or “guaranteed” investment certificates (GICs).
These investment vehicles allow the banks to work with our cash, and pay us ultra low fees to do so.
Granted, guaranteed investment certificates are “guaranteed”, as in you will get the returns that are promised to you. However in reality if you have bought a GIC that is paying you less than 3% per year, the only guarantee is that you are losing money.
Why? The reason is simple, and one of the main reasons you need more reliable investments…
Inflation. is the silent killer of the savings and low yield investment world.
Inflation continues to climb 2-3% per year while everyone jockeys to get the best investment returns possible and stay ahead. If we aren’t making more than 2-3% per year return on our money, over time our buying power becomes less and less as the cost of goods and services increase with inflation.
It is absolutely paramount that we invest to combat inflation, as inflation slowly turns our dollars into dimes over time in terms of what our money is going to be able to afford us in the future.
A person holding $20,000 in their chequing account since 2008 out of fear from the financial crisis would have witnessed their capital shrink to around $16,140.
Now, of course your money doesn’t literally shrink.
It’s easier to think of it this way…
Something that would have costed $100 in 2008 now costs around $119.30.
You can now see how your investment returns are quickly eaten away by inflation, and more importantly your bank or mutual funds fees.
An 8% return doesn’t look all that promising once you’ve subtracted 2.25% for inflation and the 2.25% management fee from your bank.
Now our second reason that you need better investments…
2. Damage Control.
The security, or risk of your investments is based on many factors that are completely outside of your control. Here is just a handful of them:
- Strength and efficiency of a company.
- Strength of an industry.
- Changes in an industry.
The strength of a company and the industry it operates in are outside of your control.
Industry changes are also outside of your control.
When you purchase a company’s stock without taking the proper steps to protect your investments as a whole, where have you left your money?
If you guessed… “outside of my control”…
You are correct.
What can I control?
You can control the way you invest
Due diligence can save an investor’s portfolio from catastrophic failure, but only if they know how to execute it well. Following the herd is a common investment strategy by investors that lack true skill.
What typically happens to them? Well, look no further than the dot-com bubble in 2000, or the collapse of the Canadian cannabis industry in 2019.
You can control your diversification
You can spread your money across several different companies operating in several different industries, thus increasing your chances at protecting your money from negative industry changes, or negative changes within a company.
Some common examples? Insurance and financial companies often thrive in high interest rate environments, while telecom and utility companies struggle. When interest rates drop, financials struggle while telecom and utility companies can borrow money cheaper to build infrastructure.
In a booming economy, oil producers tend to thrive. In a slowing economy, it may be wise to look towards pipelines.
What about swings of the entire market?
What if the majority of the companies I have go into a slump?
Just because the markets have gone down, doesn’t mean the quality of the companies you own are suffering. In fact, market crashes are often due to simple fear. Every investment you make should come with a concrete investment thesis.
If that investment thesis hasn’t changed, you should still be comfortable owning the company in your portfolio. All the crash has done is presented you with an even better buying opportunity. This is why the large majority of successful investors employ a “dollar cost averaging” strategy.
What is also within your control is observing a company, reviewing its operations, stacking it up to the other players in the industry or the market as a whole and making an educated decision.
Company analysis and diversification give your portfolio the ability to absorb the effects of negative changes in the markets.
Analysis and diversification is not impossible to action, yet time and time again we observe people putting themselves at a mind-boggling level of risk in an attempt to get unrealistic returns.
A massive amount of investors in this day and age could make a lot more money, taking a lot less risk.
It is just a matter of time before this risk catches up to investors and because their investments are so unstable it doesn’t matter how much money they have made in the past, they are crushed.
These are the things that we need to consider when investing if our intent is to avoid crippling loss…
- Quality investments.
- Due diligence.