• For long-term financial planning, one point to note is that, on average, over long periods of time, shares have outperformed cash and fixed interest investments by 5 percent to 7 per cent annually.
• While no one can predict the future, this basic relationship should continue to hold true for the next century, barring extreme events. The return above cash rate from shares is called the equity risk premium.
• The difference between success and failure is not how investment markets behave – we know generally they generally do well over the long term – but how investors behave.
• Research suggests that investors detest the way a loss makes them feel even more than they fear the loss itself. It appears the emotional distress they suffer can be detrimental as the financial loss itself. Taking investment risks involves accepting the possibility of making a loss and suffering regret when that happens. Risk-averse investors might avoid loss, but in doing so, they also lose the possibility of making significant gains.
• The time horizon is always an important factor to consider when making investment decisions.
One of my colleagues has been busy finding which bank offers the best FD rate; but, he was very disappointed as the best rate is only 1.88% with 6 months lock-in period.
I advised him to invest if the money is not meant for emergency use or short term.
However, investing involves risks, and not many people are willing to take higher risks, spent more time educating themselves on stock investing for better returns.
For many years, I have been like him; not willing to take higher risks as I have heard too many sad stories of how people got burnt when market crashed. I was fearful then. I put my money in FD for many years and wasted many of years of opportunity of growing wealth.
We must spent more time on financial education, monitor the market closely, and learn to take higher risks for better returns.
Looking back at the bold decision that I have taken in 2003 when I decided to take higher risks, spent more time educating myself on trading, and started active stocks trading.
See the above table for the result of returns vs FD rate.
When I casually mention financial independence through trading stocks to friends, relatives and colleagues, they do not seem to believe that it is possible. Quite sad that I could not honestly tell them that I believe I am on target in 4 year time by Sep 2011.
Disclaimer: Stock trading involves significant risks. Create Wealth trader is not a licensed Investment Adviser and will not be responsible for any losses which you incurred. You are advised to always do your own homework before making any trading decision.