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Thursday, February 29, 2024

How To Become A Good-Enough Investor?

“You don’t need to be great to Start, But you have to start to be Great!”

Zig Ziglar

To make a lot of money, you don’t have to be a great investor. You need to be a good-enough investor. Once you’ve mastered the technique, you’ll be able to ride an almost constant tailwind toward financial independence. You’ll also learn not to blow yourself up and lose all your progress.

One of my favorite aspects of investing is that it is a fairly meritocratic effort. To invest, you don’t need a fancy college degree, a good personality, or to be of a certain race or gender. You can get started as long as you have internet access and at least $10.

How To Become A Good-Enough Investor

You’ll be ahead if you can get your investments right at least 51% of the time and avoid blowups. Ideally, if you can achieve a 70% win rate or higher over time, you will likely amass far more money than you will ever need.

1) Start with the objectives

To become a better investor, you must first understand why you invest. List all of your justifications. Among the most common are:

Bad investors, on the whole, do not invest with a clear goal in mind. Instead, they invest for the thrill of trying to make more money for the sake of making more money. When this happens, they tend to lose their discipline and become gambling addicts with investment FOMO. Your risk parameters are thrown out the window once you’ve adopted a gambling addict’s mentality.

You will reverse engineer how you will get there and take action once you have identified your key reasons for investing. Enough investor is a rational investor who will take the necessary steps to achieve their goals.

For example, suppose you have a newborn and want to attend college in 18 years. You estimate that four years of college will cost $500,000 by 2040. As a result, you will determine how much you will need to earn, save, invest, and return to accumulate $500,000.

Following that, you will learn about the 529 college savings plan and the Roth IRA. Finally, you will decide whether paying 100% of your child’s college expenses is a good idea in 18 years. A good investor makes plans for the future.

2) Understand your risk tolerance

Understanding your risk tolerance is the most difficult aspect of becoming a better investor. At least two bear markets are required to understand truly. During your first bear market, you will most likely have underestimated your risk tolerance because you will be more concerned about losing money than you anticipated.

You will still feel bad about losing money during your second bear market. However, the shock will be less severe because you have most likely adjusted your asset allocation to better match your risk tolerance. Furthermore, you’re probably earning more money to compensate for your losses.

By the time the third bear market comes, 15-30 years later, you will be a seasoned investor. You’ve made additional changes to your asset allocation to get as close to your true risk tolerance as possible. To quantify your risk tolerance, convert potential losses into lost time.

You can’t afford to take investing advice from someone who hasn’t been through at least two bear markets. I understand how easy it is to market yourself as an expert in anything these days. However, before you spend money on someone or their products, please take the time to learn about their track record and background.

3) Have enough skin in the game to feel some pain

“Those who can, do; those who can’t, teach,” says George Bernard Shaw in his 1905 play Man and Superman. To have enough skin in the game to matter is one translation of the quote.

We can say whatever we want about an investment. However, to become competent investors, we must invest enough money in an asset to make it painful if things go wrong. You won’t care enough to do your due diligence if you don’t have enough skin in the game.

Rationally, the greater your conviction, the greater your investment. The more you invest in a specific asset class, the more research you will conduct before investing. You’ll also be much more concerned with safeguarding your investment.

A good investor makes enough money to pay attention. Then, once they have a firm grasp on the investment thesis, they press. A poor investor either invests too little or too much about their risk tolerance, or does not invest at all.

4) A good investor knows baseline returns and valuations

As a stock investor, you are aware that the S&P 500 has averaged a 10% annual return since 1926 when dividends are reinvested. A good-enough stock investor also monitors valuations about historical averages.

Every good investor understands that consistently outperforming the S& P 500 index over the long term is impossible. As a result, every wise investor knows that the majority of their assets (80%+) should be invested in low-cost index funds.

A good-enough real estate investor recognizes that historical annual returns are approximately 2% higher than the annual rate of inflation.

A great real estate investor will also be aware of the historical cap rate average in a given area in comparison to the current cap rate average.

An investor also understands that past results do not guarantee future outcomes.

Past performance only serves as a guide for the future. A good-enough investor must then decide how the future will change.

5) Don’t be delusional and attribute the results to your wrong reasoning

Although Vanguard’s dramatically lower return forecasts for US stocks and bonds appear to be correct so far, its reasoning could be incorrect. Once the results are in, conduct a post-mortem analysis of your investment thesis.

Vanguard, for example, assumed that inflation would fall even further, implying that the risk-free rate would fall even further. With a lower risk-free rate, stock and bond returns may fall because investment returns are relative to the risk-free rate. Total returns equal the risk-free rate plus the risk premium.

However, the risk-free rate increased significantly as inflation soared. The rate and magnitude of rate increases caught investors off guard, precipitating a bear market.

6) Become a better investor by inviting dissension

We’ve all had high-conviction investment ideas go wrong. Bad results are why post-mortem investment analysis is so important. We don’t want to make similar logical but incorrect assumptions in the future.

When it comes to investing, having blind spots is extremely dangerous. As a result, good investors ask for feedback from others with opposing viewpoints. They ask others to point out what they may be overlooking.

As an investor, it is easy to develop groupthink. Groupthink is common in corporate management, team sports, personal finance, social media, and other fields. You might eventually find yourself in one big echo chamber, driving off a cliff. Take precautions!

If you mostly interact with people who look like you and come from the same socioeconomic background, you’re probably suffering from groupthink.

Are you being a contrarian for the sake of being a contrarian? Or are you seeing something that others aren’t? Other investors did not seem to be connecting the dots with my Series I Bond interest rate decline bullish thesis. The bullish thesis seemed self-evident, which made me wonder what I was missing.

Fortunately, I have a platform that encourages open discussion. Furthermore, you or anyone else can read Magnates Finance for free and leave comments.

7) A good-enough investor is a man or woman in the arena

Who is it that never wins? It is the person who never enters the arena to fight. Instead, they sit in cheap seats and criticize others while refusing to do anything themselves. Take on the role of the man or woman in the arena.

Yes, it can be embarrassing if your investment thesis is incorrect. Yes, people may mock you for failing and losing a lot of money. But who are they to judge?! After all, it was your money on the line. Don’t look back on your life and bemoan the fact that you never tried!

People who try to make you feel bad are those who are too afraid to try. People who are supportive after you’ve failed, on the other hand, understand what you’re going through because they’ve been there. Failure is unavoidable. Accept it!

You will learn from your mistakes and make better decisions in the future.

8) A good-enough investor knows when to take profits

There is no point in investing if you never take profits. Yes, the ideal holding period for the S&P 500 and real estate is almost certainly indefinite. But, do you want to be 92 years old and worth more than $100 billion like Warren Buffett? Perhaps for a month.

Instead, a smoother consumption curve is preferable. You will not only enjoy your wealth more, but you will also save a lot of time and stress as a younger person attempting to accumulate such wealth. I’m confident that the majority of Magnates Finance readers will die with too much money, which is why decumulation will be necessary at some point.

Selling stock from time to time is essential if you are a growth stock investor. Because growth stocks do not pay dividends, you must occasionally sell to extract some of the value of your investments. Bear markets quickly obliterate capital gains.

It is best to reduce risk when valuations reach one standard deviation above the trend. When valuations reach two standard deviations above the trend, you should consider liquidating your entire position.

One of the most common mistakes that bad investors make is extrapolating good times too far into the future.

Mean reversion is a real phenomenon. When valuations become excessive, a good-enough investor takes profits. You may be correct in the short term. But you may not always be correct.

9) Never stop studying the markets

If you want to be a good enough investor, you must treat investing as a second job or at the very least a side hustle. The larger your investment portfolio, the more careful you should be. If you don’t take investing seriously, you could lose a lot of money quickly.

Don’t let the pain of the recent bear market go to waste if you’ve lost a lot of money.

Review your net worth and investments every quarter. Subscribe to investment newsletters written by experts. Personal finance books and blogs should be read. Good investors are well-versed in finance, economics, and global affairs.

But guess what? Having a second job as an investor is also extremely exhausting, particularly during bear markets. So, do you want to be a great investor or just a good enough investor? I opt for the latter.

A Good-Enough Investor is Good Enough!

A good investor takes years to develop. Instead, I’m a competent investor who generates enough passive income to live the life I want.

There’s no need to be a great investor unless you want to become an investment professional. Even great investors can’t outperform their respective indices in the long run, so why bother trying? Instead, as a do-it-yourself (DIY) investor, concentrate on your strengths.

Your investments are designed to run in the background while you live your ideal lifestyle. If your investments are robbing you of joy, you should probably reevaluate your risk tolerance. The same is true if you get high after every victory.

Be conscious of who you are. To succeed, you don’t have to be a great or even a good investor. Being good enough, as with most things in life, is sufficient!

Do you consider yourself a good investor, or reader? What other suggestions do you have for how we can become better investors over time? Feel Free to Comment Down Below.

1 COMMENT

  1. Very nice post. I just stumbled upon your blog and wanted to say that I’ve really enjoyed browsing your blog posts. In any case I’ll be subscribing to your feed and I hope you write again soon!

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