Last week, I shared some conversation tips with my readers. This week, I would like to share some investment tips. Originally, I wasn’t planning to blog about this today. However, the recent stock market turmoil has pushed me to do so.
The issue with the stock market is that people are too greedy and self absorbed. They think they can time the market. They believe they can make quick money.They know risk is involved, but it doesn’t occur to them that they could lose everything.
In my opinion, the stock market will go up in the long run. There will always be ups and downs, but generally, if you are investing for long term, you’ll be fine. HOWEVER, if you’re looking to make a lot of money in a short amount of time, it is
very VERY risky.
In order to “win”, one has to buy low and sell high. However, most people does the exact opposite. When the stocks are low, most people are afraid it will go lower; as a result, they’re trying to get rid of everything and/or refrain from buying. Yet, when the stocks goes up, people are reluctant to sell and instead, buys, because they think it will keep going higher!
This will eventually lead to disaster.
The moment something bad happens, people will panic.
They will sell, sell, sell, sell, SELL.
Calm down. The storm will pass. If you’re going to freak out and sell everything, you will lose even more.
Stop trying to make fast money with minimum work. Nothing quick and easy lasts. You may get lucky once or twice, but in the long run, you could lose everything.
Be the tortoise. Slow and steady wins the race.
NOTE: If you are very knowledgeable about the stocks you have invested in, you may be able to “win”. However, it has been known that passive management actually does better in the long run compared to active management. I don’t want to go into too much details because it’s a bit tedious for me. Feel free to google and find out more though.
Some other things you should consider when investing are:
How old are you? Human capital is highest when we are young, as our time remaining in the labour force is long. If you are staying in the workforce for a long period of time, you can afford to take more risks because you may be able to quickly earn back your losses. However, if you are closer to retirement age, your human capital is very limited. A loss will hit you a lot harder.
Volatility of your income
What type of labour income do you have? Do you have a stable job, or are your paychecks unknown each month? If your income is steady, you can afford to take more risks than someone with an unsteady income.
Significance of human capital as a % of total assets
If 100% of your total assets is based on your human capital, it means you’re doomed without your job.
Don’t take risks if you cannot afford to lose.
Avoid having too much eggs in one basket
Straight forward. Don’t put all your eggs in one basket. If you drop the basket, all your eggs will crack. Diversify!!! Do not only invest in one thing!!!!!
Need for liquidity
If you are investing in something for a long term, you probably will not (should not) be touching the money for awhile. Therefore, make sure you do not invest everything you have. You should have at least 3 to 6 months of savings (cash) available in case of an emergency.
Remember, human capital can be lost due to disability or mortality. You should always secure yourself by purchasing insurance.
One gets rich by taking risks (or inheriting assets). One stays rich by minimizing risks, diversifying, and not spending too much.