“There’s no point being the richest person in the graveyard – the growth returns there are abysmal.”
“The investment world is populated by investors who know the price of everything; but the value of nothing.”
“If you aren’t willing to own a share for 10 years; don’t even think about owning it for 10 minutes.”
“If you believe the only way is up, remember the only thing in life that goes up and never falls is your age.”
In the minds of many consumers there is decidedly no difference between investing in the stock markets and gambling – in several ways they are right. But such a simplistic analysis ignores some very important distinctions and some very salutary rules.
Dictionary definitions of the two activities are unhelpful because they are mostly ambiguous. “To take a risk in the hope of gaining an advantage” and “To commit money in order to gain a financial return” could equally apply to both. This piece does not address the merits and demerits of whether or not investing is socially beneficial and/or gambling is morally wrong. It is more concerned with the rules and controls that distinguish investments.
MMPI believes that the crucial difference lies in one’s attitude to risk. Risk-taking is an intrinsic element of any decision to invest or to gamble. There is a tiered risk-scale available to investors to assist them in understanding the exposures being undertaken. If properly constructed, this risk-scale provides investors with an ideal opportunity to differentiate themselves from gamblers. No such acceptable risk measure is available to gamblers although individuals do have their own favourite gaming strategies.
Humans find it extraordinarily difficult to plan for distant events. Yet long-term planning is pivotal to investing. If consumers had the discipline to invest a little over a long period then the wonders of compounding would ensure a healthy return.
In addition, humans tend to over-simplify finance. They might save, say, a fixed €100 per month from their salary but they’d be better off saving a fixed percentage. This is because as salaries improve over time the nominal saving increases even though the percentage stays the same; (Oh! percentages are so hard – Ed). Think of it another way. It’s amazing the number of people who buy petrol in lots of €20 regardless of the price. Their logic is that their fuel costs always work out at €20!! – Whereas, if they regularly bought 20 litres, they would notice the true cost differences.
Investment rules should not be static – they should be adaptable – personal circumstances do change and, therefore, warrant an investment reappraisal. However, a few simple principles will go a long way to establishing investment rules that make a real difference.
- Find your appropriate risk-tolerance level;
- Plan for the long-term (no even longer!);
- Believe in the magic of compounding;
- Work with a percentage of your income;
- Don’t be swayed by short-term trends;
- Be conscious of your changing circumstances;
- Consult with a trusted adviser (MMPI).
