Читать книгу Ignore the Hype - Brian Perry - Страница 14

Investors let markets work for them over time. Investors are bloodied, but not knocked out, by market crashes. Investors let the long-run-upward progress of the economy and corporate profits work in their favor, comfortable in the knowledge that time is their best friend, and compound interest their staunchest ally.

Speculators, on the other hand, depend on the greater fool theory, because inherent in every speculation is the belief that you know better than others what something is truly worth.

Speculation, otherwise known as short-term trading, is an exceptionally difficult endeavor, which is why successful traders are so well paid.

Furthermore, an already difficult task becomes nearly impossible when done without the benefits that come from a full-time, professional focus upon the financial markets. The vast majority of individuals should therefore avoid trying to trade as if they were a hedge fund manager or investment banker.

For one thing, the risk-and-reward scenarios for hedge fund managers are extremely skewed. If a hedge fund manager is successful, he or she is richly rewarded. If on the other hand managers lose their investors' money, the worst thing that can happen is that they have to close their funds. Importantly, the managers do not have to reimburse the investors' losses. This means that hedge fund managers have a strong incentive to invest aggressively in hopes of generating sky-high returns.

Compare this situation to your own. You benefit from higher investment returns through a larger portfolio and eventually perhaps an enhanced standard of living. In this way, your upside incentive is similar to that of a hedge fund manager. However, it is on the downside that you bear little 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.