relation to the hedge fund manager, because, while hedge fund managers can simply walk away if they lose their investors' money, you don't have that luxury. Any losses you suffer may prevent you from achieving your financial goals. This means that not only must you focus upon growing your portfolio, but you must also focus on preserving your principal and sustaining any previous gains you have enjoyed.
With that in mind, you would do well to take a long-term approach to investing, one that allows the power of compound interest to work in your favor over time.
Investing is a process in which you do the following:
Identify precisely what your financial goal is.
Calculate what rate of return you require in order to meet your financial goal.
Determine, based on the best available information, which portfolio mixes are most likely to help you achieve the return you require.
Select from the available portfolios the one with the least amount of risk.
Monitor and adjust your portfolio as necessary.
Let time and the power of compound interest work for you in meeting your goal.
Compare that approach with short-term speculation.
Here is the dictionary definition of speculation:
Speculation: The forming of a theory or conjecture without firm evidence
I'll leave it for you to decide whether you want to trust your family's future to that. If not, then it's time to shift your attention to speculation's evidence-based cousin, investing.
Critically though, investing will require you to form mental and emotional defenses that will allow you to ignore the hype.
So, Why Is It So Damn Hard to Ignore the Hype?!
This is a piece of cake. All that you need to do is identify a logical approach to your finances, implement it, and then stay the course. Do this and one day you'll be financially free and able to live the life of your dreams.
So why is it so damn hard to do that?
After all, that process sounds pretty straightforward and, although it's not simple, a book such as this one will lay out in sufficient detail what you need to do in order to achieve that life of your dreams. And let's face it, you already know without my telling you that you should stay the course and ignore the hype.
So again, why is it so damn hard?
Well, imagine an ancient ancestor of yours. This ancestor is out for a leisurely walk when suddenly he sees someone running toward him at a rapid pace. As the newcomer speeds by he shouts, “Look out! There's a saber-toothed tiger coming.” Your ancient ancestor immediately turns around and follows the other guy as they both run away as fast as possible. The saber-toothed tiger doesn't get them and they both live to tell the story around that evening's campfire.
Word rapidly spreads among the local tribes that there's a saber-toothed tiger around and it might not make sense to visit the part of the forest where it was last seen. Everyone wisely follows that advice. Knowledge such as this has been vital to humanity's development for 200,000 years. Even if a rumor couldn't actually be confirmed, it still made sense to listen to it because no one actually knew what was out in the dark forest and the consequences of stumbling upon that angry saber-toothed tiger were too terrible to imagine.
Well, the last saber-toothed tiger died off somewhere around 11,000 years ago, and the world has changed in a lot of other ways since then. What hasn't changed is our propensity to listen to what our neighbors say as we try to learn from the collective wisdom. This system works in a lot of ways, but it also has some drawbacks. That's because your neighbors are prone to fear and greed. And guess what? So are you. That's why it's so hard for you to ignore what the crowd is doing and stick with your chosen course.
There then lies the solution to your financial troubles. All you need to do is rid yourself of fear and greed and you'll be good to go.
My work here is done and that's the end of the book.
Good luck!
What's that? You're still reading and I'm still writing?
Oh, yeah, that's right. You're all human after all so there is literally no way to rid yourselves of fear and greed. Darn!
Well, then? This book will have to be somewhat longer, because since you're unable to rid yourself of fear and greed you'll have to resort to Plan B. Plan B involves learning tools, strategies, and techniques designed to make it easier to avoid giving in to those emotions you're unable to get rid of.
It won't be easy. But it is possible. First, you'll need some education around a logical approach to your finances, an approach you can believe in. Following that, you need to be aware of some of the more nefarious influences you'll come across on your journey toward financial freedom. To be fair, mere awareness is unlikely to solve your problem, but it is a starting point toward formulating solutions for avoiding the temptation to give in to fear and greed.
To Play, or Not to Play, That Is the Question
Change is constant in this world, but the evolution of financial markets has not been a steady, uniform process. Instead, the pace of innovation has accelerated like a snowball cascading down a hill.
Consider, if you will, the impact that social media has had on the dissemination of financial news, or the increasing sophistication and competitiveness of today's institutional investors, or the rise of high-frequency trading and the manner in which it magnifies market movements.
All these developments and more have not only introduced new complexities for individual investors to consider, but have also accelerated the impact of prior evolutions. As such, the skill level required to successfully navigate the markets has increased exponentially. Phrased differently, the game has indeed become rigged in favor of those investors able to bring massive quantities of resources to their efforts.
With that in mind, the individual has only two choices. The first is to try to compete with better equipped players in a game that is clearly rigged against them. The second – the preferable – choice is to choose not to play the game at all.
Just so there is no confusion, let me state again, here at the outset of this book, that the game is inarguably rigged against the individual investor and that there are certain disadvantages that you are unlikely to ever overcome.
There – I've said it, and I'm not sorry. Consider yourself warned. Because the truth of the matter is that, given how markets have developed over the past several decades, the average person has little hope of competing with the big boys. To even attempt to do so often constitutes a fool's errand, and is likely to result in frustration, poor performance, and ultimately failure to meet one's financial goals.
That, in a nutshell, is the bad news.
The good news is that ordinary people just like you can still successfully and profitably invest in the financial markets.
Furthermore, in some ways you actually have important advantages institutions lack. The key to your financial success is to maximize the inherent advantages you possess while avoiding the temptation to mimic the behavior of the institutional investor.
Although you can still profit in the financial markets, doing so will likely involve adopting strategies and tools different from those you've used in the past. Success requires mental and emotional fortitude, a willingness to stand apart from your peers, and formulating a disciplined and repeatable approach to investing. On the plus side, while markets and economies have grown more complicated, your approach need not be overly sophisticated. In fact, you might even say that successful investing is simple.
Of course, just because something is simple doesn't mean that it is easy.