It’s not a Race

Money Race

 

It can be a hard pill to swallow, but there will always be someone whose portfolio has outperformed your own. Of course, also by that same virtue, there will always be someone whose portfolio performed worse than yours. We are often made to feel that stock market investing is a race – you want investment ideas that “beat” the market.

 

Take for example, Tesla. The price of the Elon Musk owned company shares went from $230 in July 2020 to $1,450 per share in August 2021, i.e., an increase of almost 500 times, with Tesla emerging as the largest car maker (ahead of Toyota) with a value of $270bn.

 

If you owned Tesla during this time, no doubt you feel like this was a “win” and it is not hard to understand how someone who did not own the stock may feel like they “missed out”. There will be plenty of people who may now want to buy Tesla to partake in what they think will be the continued growth in the share price. That this also is a good conversation topic at the dinner table or by the water cooler is an added bonus.

 

Situations like Tesla are a classic example of when you may feel like stock market investing is a competition. The language used in the media – the funds to beat, top performing stocks etc. reinforces the feeling that investing is a race and we somehow have to beat the others in this “game”. This, however, could not be farther from the truth. True investing is not about competition. You do not get a prize for doing better than everyone else. What truly matters is did your investment choices and plan help you achieve your goals when you wanted to? Did you manage to have access to sufficient funds for your kid’s education / wedding / holiday travel and of course to fund your retirement?

 

Once linked with your goals, investing has nothing to do with what everyone else is doing and is entirely a matter of your personal situation and individual choice. These goals, and how to achieve them is the (or at least should be) key aspect and driver of your investment decisions. Although the temptation to believe that achieving your goals by investing in “Winners” is very strong and alluring, after all a 500% return (as with Tesla) would make short work of your goals! This is the point where one must consider the risk. The temptation to chase big returns fast has often led investors to lose billions of dollars – think Bernie Madoff in the 1990s and 2000 or even the investment in Bitcoins when they rallied in 2017.  Of course, not all investments are frauds or Ponzi schemes, but making an investment decision solely driven by returns has inherent risks:

  • The decision is based on hindsight i.e., past returns and the expectation of the continued trajectory into the future. This may or may not materialise. In fact, almost no investment can repeat past returns continuously.
  • When chasing performance, you are likely to invest in a concentrated portfolio which is all well and good when things are going up, but what when prices crash.

 

The alternative
So, while flashy eye-catching returns seem appealing and even exciting. Consider an alternative approach – identify your goals and assess the average steady returns that allow you to meet your goals and then stick to a plan. This will allow you to avoid getting caught up in a competition where more than likely you will play catch up!

 

The key – broad diversification, accessing low-cost products and maintaining a long-term outlook. As Warrant Buffett has noted, “Investing is the transfer of the wealth from the impatient to the patient.”

 

 

Source: INVESTING IS NOT A COMPETITION – By Patrick Cairns

 

Niyati Khanna (CFP® Professional, CA, MBA [Finance & Strategy]) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.

Note: This material is provided for GENERAL INFORMATION ONLY. No account has been taken of the objectives, financial situation or needs of any particular person or entity. Accordingly, to the extent that this material may constitute general financial product advice, investors should, before acting on the advice, consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation and needs. This is not an offer or recommendation to buy or sell securities or other financial products, nor a solicitation for deposits or other business, whether directly or indirectly.

 

 

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