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December 2, 2010
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What lessons can be learnt from investing money in the stock market, but when it goes wrong?
It means that the investment choices made were not based on a person’s individual financial situation and goals.
Every investor and potential investor needs to take his personal situation into consideration and use that information to set financial goals for a specific time frame (meaning the time when the money invested will be needed for something else, such as retirement).
Then, pick the types of investment that will best meet these goals.
In simplified terms, this means an analysis of risk vs reward. Not having adequate diversity is very risky for almost every type of investment. Different methods of achieving diversity are available, depending on the total amount of money involved with each transaction.
Not matching the risk / reward analysis with the proper time frame is one of the biggest contributors to stock market losses. The stock market can be counted on to always go up over very long periods of time; it always has. But as the time frame is decreased, the ups and downs of the stock market increase the risks involved by a large amount. Stocks are designed to be long term investments, but some are more risky in the short term than others. This is where a person’s individual situation is very important to the choices made. For example, if the goal is to have an income in the retirement years, a person who is 25 will want to try to maximize long term gains. Since in the long run the stock market will increase, the short term ups and downs are going to be mostly irrelevant (unless you are into market timing, which inceases risk). But a person who is going to retire within a year will need a different outlook. For this person, long term growth is irrelevant, but the short term ups and downs will make a big difference in the outcome. This person will need to minimize risks and forget about maximizing returns. Safe investments will be the only logical place for this person to invest money. If investments are perfectly safe, the only losses can come from potential short term increases in inflation above the expected inflation rate.
For long term investments, the investment portfolio needs to be evaluated at many intervals, to look for mistakes. Any mistakes corrected as soon as possible will minimize any long term losses.
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read comments (2)
December 2nd, 2010 at 11:43 pm
It means that the investment choices made were not based on a person’s individual financial situation and goals.
Every investor and potential investor needs to take his personal situation into consideration and use that information to set financial goals for a specific time frame (meaning the time when the money invested will be needed for something else, such as retirement).
Then, pick the types of investment that will best meet these goals.
In simplified terms, this means an analysis of risk vs reward. Not having adequate diversity is very risky for almost every type of investment. Different methods of achieving diversity are available, depending on the total amount of money involved with each transaction.
Not matching the risk / reward analysis with the proper time frame is one of the biggest contributors to stock market losses. The stock market can be counted on to always go up over very long periods of time; it always has. But as the time frame is decreased, the ups and downs of the stock market increase the risks involved by a large amount. Stocks are designed to be long term investments, but some are more risky in the short term than others. This is where a person’s individual situation is very important to the choices made. For example, if the goal is to have an income in the retirement years, a person who is 25 will want to try to maximize long term gains. Since in the long run the stock market will increase, the short term ups and downs are going to be mostly irrelevant (unless you are into market timing, which inceases risk). But a person who is going to retire within a year will need a different outlook. For this person, long term growth is irrelevant, but the short term ups and downs will make a big difference in the outcome. This person will need to minimize risks and forget about maximizing returns. Safe investments will be the only logical place for this person to invest money. If investments are perfectly safe, the only losses can come from potential short term increases in inflation above the expected inflation rate.
For long term investments, the investment portfolio needs to be evaluated at many intervals, to look for mistakes. Any mistakes corrected as soon as possible will minimize any long term losses.
References :
December 2nd, 2010 at 11:53 pm
Simply that investing did not "go wrong." Risk is an assumed part of what you are doing.
References :