When I started my journey in stock market investment or in finance, I was surprised to discover how much fake unusable information is there on news or in social media…..
When I started my journey in stock market or in finance, I was surprised to discover how much fake unusable information is there on news or in social media, like “you can buy these 5 stocks” or “if you missed out these stocks you will regret.” These headlines are designed to attract attention, not for building wealth.
There is no shortcut way to create wealth, you have to put effort or time. If anyone is saying to you that you can become rich in few days most probably he is trying to betrayal you. Becoming a successful trader or investor, you don’t have to do lot of things, you only have to keep in mind a few principles. That principles you have to apply consistently on a long basis. In this blog post I will share you 5 most essential truths about investing all tested in real world, supported by academic researchers or renown investors. If you internalize these truths, you will be way ahead of lot of investors.
Risk and return are two side of coin
One of the first lesson we have understand about investing is risk is always go together with return. You can’t separate both things that impossible. If you invest in stock last month that gives 50% return in a month, you think that’s a dream opportunity. But you don’t keep in mind is risk — the chances of your stock going down 50% is always there. This is nature of investing.
Let’s take a simple example: if you invest $1,00,000 in tech stock like artificial intelligence and that stock give you 50% return in a month then your value become $1,50,000. But next, because of poor results, stock crashes by 50%, then amount will be $75,000. In a 2 months you lost almost quarter of money despair, despite the 50% growth.
This why conservative investment plan like governments bonds or high quality fixed deposit give you 5 to 7% return in a year because they are less volatile — they carry less risk.
In finance when the risk high the chances of return is also high relatively. You get a understanding by above example. Bonds is less risky that’s why the return is low but stock has high volatility and they are more risky than bonds or fixed income instruments, there is the chances of getting return is high. But in case you put your money in stock and stock is giving 7% to 8% return then you’re taking risk and you are not getting any reward because if you put same amount of money in governments bonds you get free risk return. In fact the government never default in majorly cases. Then you are picking wrong stock or you don’t have knowledge about how to do stock investing.
Financial markets are largely efficient.
If someone is promise you the return 30% in a year without taking risk then this guy is misleading you have to walk away from there. Financial markets are largely efficient. Means what? Lot of investors, researcher firm or hedge fund constantly gathering the information and react immediately. If you find any stock undervalued or valuable, that stock won’t stay undervalued or valuable for long time.
Here how is it work: when they analysis or they get information they go and buy stocks immediately. That’s why the demand of the stock goes up immediately, this affect the future possible return. This is why there is no guaranteed future return available in market or secret opportunity. But if you are constantly looking for good stock then have to put lot of effort because your competition is always the higher player because they earn major amount of money in the market. That’s same applicable everywhere in stocks or in bonds.
Diversification is only friend of investor.
There is one famous quote about investing is “you can’t put all your eggs in one basket.” You have to diversify portfolio on basis of stocks, commodities or bonds this help you to manage risk. But more diversification kill your return this thing also keep in mind.
Example: if you have stock portfolio or bond portfolio — if your corpus is not big enough then 5 to 6 stocks in various sector is good. But you are putting your money in 20 stock that will affect your return drastically. But your corpus is too big then 20 stock is good choice Or various sectors, more than 30 or 35 stocks then that’s don’t give exponential returns. That’s thing you have to keep in mind.
Reversion to the mean
This concept called reversion to the mean means example like take is gravity if you throw the ball in sky after some time come on ground. Same logic are applicable in markets. Any stocks goes up he will correct and then again continue his rally. This Google stocks picture give you understanding what I am talking to you.
On an above Google stock — let’s see how stock goes up, it will correct and then again continue his rally.
We will take another example of a bond — Fannie Mae bonds (US government bonds). Usually this bonds give 6% returns p.a. but suddenly they give 18% return — surely because of unique market condition. Many investor think this trend will continue and they invest their money heavily. But what happen next? Stocks returns are coming to mean return (average return) and investor end up in disappointment.
Investment cost matters
Many investors ignore the truth, but this is the most important one. Fees and cost reduce your wealth silently. Let’s say you invest $5,00,000 in two different mutual fund. One charges 1.5% expense fee and second one charges 0.5% expense fee. Both give the same return like 5% CAGR After 10 years the higher cost fund gives you $7.05 lakh and cheaper cost fund gives you $7.78 lakh. Then the difference is $73,000 — just because the 1% lower fee. You get the point that’s why I take a big number. On big number you get a proper difference.
Fund companies that charge more money spend lot of money on advertising, and they do a great job conning the public into thinking that their funds are somehow worth the extra money.
But studies shows again and again cheap expense ratio fund beat the higher expense ratio over long run.
Investment success is built on a few timeless principle. We will discuss all of them. If you like our content then pls visit us again.