Recognizing A Trend!
Now that we are out of The Financial Trap (therefore cutting our expenses) and are increasing our Income, what do we do with the difference? INVEST! There are a lot of things to consider before people start investing their money. Whether investing in rental property, stocks, or a personal business venture, the first priority should be to understand the specific economic environment that you live in.
There is not a single investment strategy that is applicable to everyone because the specific geographical location, current market conditions, and wealth level can vary person to person.
The time in which we live also affects the way we invest our money, so investment strategies that worked 10 years ago or even 1 year ago may not be viable in today’s market. Do not worry though, instead of giving you a fish, I will teach you how to fish! So instead of investing in what everyone else is, become an independent investor and have the ability to independently recognize trends. Being able to recognize a trend in the world is something anyone is capable of, regardless of their current level of wealth.
The trend could be as simple as recognizing that Apple’s iPod, which was released in October 2001, was beating other competitors in the portable music playing space. If you were able to recognize this trend in 2001, an investment of $1,000 in Apple stocks (priced at $1.36 per share on Nov 9th, 2001) would yield a return of more than %10,000, leaving you with $108,784 today in 2017 (with a closing price of $141.42 per share). I do not know about the general public, but I would absolutely prefer having $108,784 in 16 years than $1,000 today. With the magic of compound interest, patience, and smart investments, it is possible to grow a single dollar into something much more significant.
Apple’s Growth Starting From 2001
Invest! In What?
Stocks are not the only option people have to invest their money. There are plenty of asset classes that are safer and less risky than investing in a single stock. Some other popular financial products that people invest in are bonds, REITs, stock options, index funds, mutual funds, and/or, investment real estate properties. There are plenty of more niche options that people can invest in that I have mentioned in my article, “How To Increase Your Income”. One good example of an appreciating asset is high-quality artwork. Certain paintings can be bought and sold for significant profit if you have an eye for investing in art. Whatever product you decide to invest in, it is important that you try to learn as much as possible about that specific industry before investing.
It is possible that investing money into a financial product may make no sense for some people. For some, it may make more sense to invest in a personal business venture. Putting money in an entrepreneurial pursuit may be the best option for a lot of people as that can easily have the best future returns. Becoming an entrepreneur in today’s day and age is one of the riskiest endeavors people can take on. However, in a whole other sense, investing in a personal business is one of the least risky things a person can do. Entrepreneurs have far greater control over their environment and business than a typical person has control over market movements. All investments carry a level of risk, and the word ‘risk’ may scare many people out of investing. Let me be clear, all investments have to have a certain level of risk. Having a certain level of risk in an investment is absolutely necessary in order to receive a significant return on investment (ROI).
Understanding Risk – Why is Risk So Scary?
Risk is a highly misunderstood concept when it comes to investing, as people associate the word risk with dangerous behavior. In financial terms, risk means something very different than how it is used in normal everyday life. People perceive certain types of investment as high risk (stocks) or low risk (Treasury bonds), but what does the word risk really mean? Simply put, risk is another word for ‘statistical variance’, the measurement of how likely a value is to differ from the historical mean. I plan to dive deeper into the statistical meanings of standard deviation and variance from a more mathematical standpoint in future blogs. However, for this article, think about risk as a measuring tool to calculate how likely a specific product’s price will change in the future, and the change can be either positive or negative.
So, in order to make ‘real’ gains that are greater than inflation (which increases 1-3 percent per year), it is important for a portfolio to contain some level of risk. If an investor was extremely conservative and wanted the ‘safest’ portfolio, then that investor would invest in Treasury bonds that yield just about %1 for a 1-year bond. This conservative strategy would only match inflation (in the best case scenario) and that is why it is important to take on some amount of risk if there are to be any significant returns on an investment.
In general, investing money is risky business. There is not a foolproof investment strategy that will guarantee success in every market. Take the housing industry in the U.S. for example. Everyone believed housing investments to be a low-risk and foolproof way to grow money, until the 2008 housing bubble burst. Instead of being afraid of risk, try to not be influenced by the perception of risk and instead be able to control risk.
In general, when stocks (or any other product) are dropping and everyone is selling, that is the best time to take a risk and buy the stock (unless that stock is a “loser”). For example, Apple, in November 2001, was a dying company that was losing market shares to Microsoft. It took a wise (or lucky) investor to be willing to invest in Apple during that time as it seemed ‘risky’ to go against the market trend. Going against the general perception of market trends may seem risky, but is a strategy supported by the great investor himself, Warren Buffett.
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful” – Warren Buffett
“Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can’t buy what is popular and do well.” – Warren Buffett
I urge people to begin thinking about their specific scenario and find the best investment vehicle for them. Without investing money, wealth will never grow passively. Get over the barriers to entry, do your homework, and start investing in something!
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*DISCLAIMER: Do not invest in anything solely based on the information above.*