This article is a guest contribution from Frank Holmes, U.S. Global Investors.
Dr. Marc Faber, the economist, investor and long-time member of the prestigious Barron's Roundtable, offers up some good perspective on investing in his latest Monthly Market Commentary newsletter.
The title of the commentary is âOne of the First Duties of the Investment Advisor is Educating the Masses not to Speculate,â and itâs worth grabbing out a few of his key points.
I feel that most investors take far too many risks â often with borrowed money â and fail to diversify sufficiently. They also have little patience, very short-term time horizons and no tolerance for losses. Finally, their expectations about investment returns are completely unrealistic⌠Most investors buy a stock or make an investment with the view that within a month the return should be between 10% and 20%.
A real return of around 4% per annum is about what an investor (exclusive of costs, and without making the mistake to buy âhighâ and sell âlowâ) could expect to achieve over longer periods of time⌠If you can achieve an annual average real return of just 3% on all your assets (inflation adjusted), you will leave a huge fortune to your children.
For the average investor like myself, I prefer diversification and no leverage. I have seen time and again investors (including myself) be right about an asset classâ future performance but fail to convert those views into any capital gains⌠All I wish to say to my readers who are not managing risk on a daily basis is that the prime consideration should always be capital preservation and avoiding large losses.
Behavioral finance research has identified many emotion-driven tendencies of investors that lead to suboptimal returns â overconfidence, chasing the herd, holding onto investments too long or holding onto them not long enough, and many more.
Marcâs points above are common-sense basics that investors should be reminded of every so often to help them make better long-term decisions.
Brilliant, simply brilliant. For ages I've been trying to educate my clients to the realities of investing. Being a long term investor doesn't mean buy and forget, but rather, buy appropriate investments taking the risk, cost, taxation and inflation into account.