Wild West or Invest For the Best
During the last couple months, we have seen trillions of dollars evaporate with major market sell-offs across the globe.
Market volatility has been at it's highest level in decades, housing prices continue to fall, and companies continue to fail.
All this happy-go-lucky news has left many investors in a state of paralysis wishing the bad man would just go away.
At the same time, my most recent scare job about the perils of putting off investing brings us to a bit of a cross road.
Should one really be investing their hard earned money into "assets" that seem to become less and less valuable by the minute? The answer to this question depends entirely on the time frame of the investment.
Investing in global businesses through the purchase of common stock can be a very scary endeavor on a short term basis, but it becomes a lot more bearable if we "zoom out" and lengthen our time frame.
What I mean by that is that monitoring the returns of the market on a minute by minute (or even day by day) basis is likely to give you a stroke, especially in today's markets, whereas looking at returns on an annual or multi-annual basis makes the ride seem a lot less bumpy.
Ben Graham, Warren Buffett's teacher and mentor, once said, "In the short run, the market is a voting machine but in the long run it is a weighing machine.
" What he meant by this is that stock prices fluctuate over short time horizons based on traders "casting votes" with buy and sell orders based on a myriad of reasons that may make the stock popular or out of favor, but over the long run, the market assesses the substance of a business as stock returns are driven by the fundamental ability of each company to create shareholder value.
So how do we know which companies will succeed and create value? The answer is, we don't.
That is not to say that we can't make an educated guess based on historical data and a prediction of the future, but the consequences of being wrong can be disastrous (e.
g.
Enron, World Com, Bear Sterns, Lehman Brothers, etc...
).
The majority of professional portfolio mangers, those that pick stocks for a living, under perform their passive benchmark (i.
e.
holding all the stocks for a given benchmark like the S&P 500).
In fact, a new study published by the N.
Y.
Times (entitled The Prescient Are Few) showed that the number of funds that beat their passive benchmarks over the long term is "statistically indistinguishable from zero.
" If this really is the case, investing in a mutual fund and paying someone a management fee only to have them lag their passive benchmark over the long haul is a very unfrugal thing to do.
Because of this, many people have turned to passively managed index funds called ETFs (exchange traded funds), which trade like stock and have very low management fees (usually 5-10 times lower than the mutual fund equivalent).
That being said, there is still room for "active investments" in a portfolio if one has an opinion or wants to "make a bet" on a specific company/sector/country.
Personally, I enjoy researching individual companies and investing in the ones that I feel will create the most long term value.
For that reason, I use a combination of index ETFs and individual stocks in my portfolio.
For those that have no desire to pick stocks or make market calls, I highly recommend a good mix of low cost, diverse ETFs (more on this in later posts).
By investing today, I can't promise your investment will be worth more tomorrow, next week, or even several months from now.
What I can state with relative certainty is that investing in global businesses will probably be worth much more than the original capital outlay 20, 30, or 40 years from now when retirement is looming.
Now if that isn't a vote of confidence ("relative certainty", "probably"), I'm not sure what is ;).
All joking aside, let me state the obvious.
Investing is not without risk and although history has proven that investing in companies through the purchase of stock has been a very profitable endeavor over the last 200 years, there is no guarantee that the next several decades will play out in the same fashion.
Ciao, Frugal Franco
Market volatility has been at it's highest level in decades, housing prices continue to fall, and companies continue to fail.
All this happy-go-lucky news has left many investors in a state of paralysis wishing the bad man would just go away.
At the same time, my most recent scare job about the perils of putting off investing brings us to a bit of a cross road.
Should one really be investing their hard earned money into "assets" that seem to become less and less valuable by the minute? The answer to this question depends entirely on the time frame of the investment.
Investing in global businesses through the purchase of common stock can be a very scary endeavor on a short term basis, but it becomes a lot more bearable if we "zoom out" and lengthen our time frame.
What I mean by that is that monitoring the returns of the market on a minute by minute (or even day by day) basis is likely to give you a stroke, especially in today's markets, whereas looking at returns on an annual or multi-annual basis makes the ride seem a lot less bumpy.
Ben Graham, Warren Buffett's teacher and mentor, once said, "In the short run, the market is a voting machine but in the long run it is a weighing machine.
" What he meant by this is that stock prices fluctuate over short time horizons based on traders "casting votes" with buy and sell orders based on a myriad of reasons that may make the stock popular or out of favor, but over the long run, the market assesses the substance of a business as stock returns are driven by the fundamental ability of each company to create shareholder value.
So how do we know which companies will succeed and create value? The answer is, we don't.
That is not to say that we can't make an educated guess based on historical data and a prediction of the future, but the consequences of being wrong can be disastrous (e.
g.
Enron, World Com, Bear Sterns, Lehman Brothers, etc...
).
The majority of professional portfolio mangers, those that pick stocks for a living, under perform their passive benchmark (i.
e.
holding all the stocks for a given benchmark like the S&P 500).
In fact, a new study published by the N.
Y.
Times (entitled The Prescient Are Few) showed that the number of funds that beat their passive benchmarks over the long term is "statistically indistinguishable from zero.
" If this really is the case, investing in a mutual fund and paying someone a management fee only to have them lag their passive benchmark over the long haul is a very unfrugal thing to do.
Because of this, many people have turned to passively managed index funds called ETFs (exchange traded funds), which trade like stock and have very low management fees (usually 5-10 times lower than the mutual fund equivalent).
That being said, there is still room for "active investments" in a portfolio if one has an opinion or wants to "make a bet" on a specific company/sector/country.
Personally, I enjoy researching individual companies and investing in the ones that I feel will create the most long term value.
For that reason, I use a combination of index ETFs and individual stocks in my portfolio.
For those that have no desire to pick stocks or make market calls, I highly recommend a good mix of low cost, diverse ETFs (more on this in later posts).
By investing today, I can't promise your investment will be worth more tomorrow, next week, or even several months from now.
What I can state with relative certainty is that investing in global businesses will probably be worth much more than the original capital outlay 20, 30, or 40 years from now when retirement is looming.
Now if that isn't a vote of confidence ("relative certainty", "probably"), I'm not sure what is ;).
All joking aside, let me state the obvious.
Investing is not without risk and although history has proven that investing in companies through the purchase of stock has been a very profitable endeavor over the last 200 years, there is no guarantee that the next several decades will play out in the same fashion.
Ciao, Frugal Franco
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