At the beginning of your wealth-building lifetime, it's your rate of saving and investing that matters more than your rate of return
People in the investing and financial world fetishize rates of return. Often cited and mentioned in financial articles is financial/investing genius Warren Buffet. Since 1965, Buffet has generated (thru 2017) approximately 21% annually. This is astonishing and deserves both praise and diligent study, but for most people who are in the early stages of their investing lifespan, it isn't relevant or useful.
The reason it's not relevant or useful for most people who are in the earlier stages of their investing timeline is that a focus on investing rates of return is useless and distracting. It's not the rate of return that matters most for a twenty-something or thirty-something investor. Instead, it's their rate of saving and investing that matters far more.
Barring ridiculously large and deeply improbably investing returns, getting more return won't be as beneficial as saving more. Imagine you have $1000 today, you can get an astonishingly high 50% return, or you can save another $1000 and get a100% gain effectively. If you've got $10,000, this becomes harder to do unless your income is very high. At $100,000, it's very hard to save an additional $100,000 - you'd likely want to start giving proper focus to investing returns. At $1 million, you'd likely begin to see more gains from investing than from saving. Obviously, these numbers need to be adjusted depending on income, but the core principle remains the same - if you don't have a lot of capital to work with, stashing away more capital is going to be better for you than trying to finesse something with the small amount of capital you do have.
News is by definition most relevant in the short term – as time moves forward each piece of news information degrades quickly in terms of how relevant and/or useful it is. In effect, information can be thought of as having a half-life. If we map things out in this respect, we can see that not all information is equal:
So, if you’ve got a limited amount of time and energy -- and your goal is to maximize the amount of useful information you obtain -- you’ll want to focus on things with a far lower half-life. In practice, that means making choices like this:
Here are two great articles that in-part inspired this piece:
Diversification is a fundamental part of successful long-term investing for most retail investors; but to get truly amazing returns, advanced investors should not over-diversify their portfolios
The conventional wisdom is that diversification is an integral part of successful investing. Although the idea of diversification has been around for centuries (and is mentioned in both the Bible and the Talmud), the modern idea of financial diversification can be attributed to the work of Nobel prize-winning economist Harry Markowitz and his Modern Portfolio Theory. We won't get technical here and we by no means will cover anything in depth, but it's a good idea to realize that too much diversification will prevent a portfolio from achieving great returns.
For most people who are not in the game to get amazing returns (who are in it to protect and grow their money at a reasonable pace), broad diversification is a great idea and will likely protect them. For those individuals who are in the game to make spectacular returns (and who should be able to tolerate more risk), diversification beyond a certain point makes them worse off. I'm not sure exactly where that point is. Some people say ten investments or stocks and some say a little more or a little less. Warren Buffett has stated that six is a good rule of thumb.
Whatever the number, the important thing to understand is that if a portfolio has too many stocks an amazing performance by a single stock gets diluted. If a stock goes up 10x (a ten bagger as Peter Lynch would call it) and it represents only 1% of your portfolio, your portfolio only goes up by 10%. The stock went up 1000% but your portfolio only went up 10%. If you want to make spectacular returns, energy must be focused on picking great businesses to invest in and discipline must be exercised to not overcrowd your portfolio.
Additionally, a part of diversification involves investing in different sectors (eg. energy, healthcare, financials, etc.). However, why would one need to invest in one hundred businesses in every sector? Wouldn't it seem wiser to invest in the best businesses in each sector?
Again, this isn't meant for individuals who dabble in the stock market, who can't tolerate the risk that comes with investing for spectacular returns, or who don't have either the time or the inclination to research businesses in an in-depth way. However, if you want to make great investing returns don't over-diversify and do your best to stay focused and disciplined on high-quality investments.
It's key to not that this entire discussion only applied to advanced and experienced investors - novice investors or investors with a moderate level of knowledge and experience should not attempt to pick individual stocks. Novice investors and moderately-experienced investors will be best served by sticking to good mutual funds and ETFs.
Here's what Warren Buffet has to say on diversification and over-diversification
Gold, Silver, and Other Precious Metals: Use them for diversification and portfolio risk management, but not for long-term investing
Gold and silver might be good ways to diversify your portfolio and guard against risk and uncertainty (strategic portfolio risk management and mitigation). You are mistaking, however, if you make precious metals like gold and silver a very significant part of your portfolio in most cases. e to edit.
Gold, silver, and other precious metals aren't productive assets - they effectively just sit around
As ultra-successful investor Warren Buffett has stated and as any good investor knows, gold and silver (and pretty much every such precious metal and commodity) are not productive assets - they just sit and look pretty. Unlike a successful business, they don't make more money, as illustrated by the below example.
If you had $1000 to invest today and you purchased silver bullion with the entire sum, the value of your initial $1000 investment in 10 years would depend solely on the supply and demand for silver. That's it. If you invested that money into buying a share of a successful and profitable business, however, the value of your $1000 investment in 10 years would depend on a lot more than the supply and demand for a share of that business. It would depend on that of course, but it would also depend on the business's management, the innovation that occurred within the business, how effectively the business model and the business's plans were carried out, etc. Over those 10 years, your silver would just be sitting there but the business would be working hard to sell products or services, grow, and become more efficient. It may turn out that the investment in the business was a bad idea, but that wouldn't be because of the nature of the investment. It might be because of other factors such as a recession, depression, poor management, an act of God, etc. If your investment in the silver bullion turned out to be extremely profitable, however, it would only be because of the speculative nature of investing. You would have guessed correctly that market forces would cause an increase in the price of silver. Over those ten years, your silver bullion would have been sitting there, but the business will have been hard at work creating value and serving its customers.
A quote from Warren Buffet on gold and silver
Here's a quote from world-renowned investor Warren Buffet - he can put it better than anyone can:
"Today the world's gold stock is about 170,000 metric tons. If all of this gold were melded together, it would form a cube of about 68 feet per side. (Picture it fitting comfortably within a baseball infield.) At $1,750 per ounce -- gold's price as I write this -- its value would be $9.6 trillion. Call this cube pile A.
Let's now create a pile B costing an equal amount. For that, we could buy all U.S. cropland (400 million acres with output of about $200 billion annually), plus 16 Exxon Mobils (the world's most profitable company, one earning more than $40 billion annually). After these purchases, we would have about $1 trillion left over for walking-around money (no sense feeling strapped after this buying binge). Can you imagine an investor with $9.6 trillion selecting pile A over pile B?
A century from now the 400 million acres of farmland will have produced staggering amounts of corn, wheat, cotton, and other crops -- and will continue to produce that valuable bounty, whatever the currency may be. Exxon Mobil will probably have delivered trillions of dollars in dividends to its owners and will also hold assets worth many more trillions (and, remember, you get 16 Exxons). The 170,000 tons of gold will be unchanged in size and still incapable of producing anything. You can fondle the cube, but it will not respond."
Precious metals like gold and silver may help diversify your portfolio and mitigate risk, even if they aren't great standalone investments
Although not good for long-term investing strategies, precious metals like gold and silver may add some risk-mitigating diversity to your portfolio if done correctly.
In many instances of economic downturns and recession -- but not all instances -- precious metals and commodities outperform traditional asset classes such as equities. Even real estate usually doesn't perform well during a recession. But, precious metals occasionally experience an uptrend during times of economic uncertainty because there is a perceived level of safety in them.
The perceived safety may arise from many reasons, which might include:
And now, given the rise of cyrptocurrencies and crypto assets to quasi-mainstream financial assets, we're dedicated to providing quality, relevant, and interesting material on cryptocurrencies and cryptoassets. Articles on Bitcoin, Ethereum, Ripple, Cardano, and many more cryptocurrencies and cryptoassets can be found on Pennies and Pounds - all that in addition to a plethora of information on what cryptoassets are, how the entire crypto industry came to be, blockchain/immutable ledger technology, mining, proof of work, proof of stake, and how to prudently invest in crypto if you are so inclined (based on your risk tolerance and ability to withstand the volatility that will come with a crypto portfolio).