Money is freedom. We all work for our money. It is the effective work we do translated into monetary units. Basically, it is our effort translated into things we can buy. Naturally, we appreciate our work and free time. Deductively, we should appreciate our money. Money is our free time we used to work and earn.
That said, how can we best appreciate our money?
Simplest of things is just to put it to good use. Let it work. Let your money make a return for you. Let your money work for you and society. You can invest in stocks, bonds, derivatives. It is your choice.
What is the most effective way to get a good return?
Basically, it depends on two variables, the first being risk and second, return. Not a lot of investors can endure risk. Risk is similar to volatility. Visually it represents the oscillations around the averages over time. Return is the slope of the average line over time. Both can vary extremely. Investors prone to risk should look at derivatives and small cap companies. Small cap companies have been a resort of experienced investors on a descending path from large cap to mid-cap to small cap. They offer great returns. Small cap companies offer great risks. Those who dare, win.
How can we protect against risk?
The short hand answer would be to diversify your holdings. Put simply, own more than one asset. Investing in a hundred different assets at once (mutual funds) literally equates your holding with an index. Then, it is much easier to buy the index. Protection against risk is not necessary in qualitative analysis of assets. It is also in somewhat quantitative analysis. Assets within a portfolio move in their respective universe. That said, it is very important for them to not move simultaneously. That is important because low correlation results in same returns without the risk. The calculations are not difficult. To sum up all the calculations, we just have to remember that volatility does not add up, it multiplies.
Are there really any low correlation assets?
It is hard to say. When markets experience high levels of risk, usually all assets move in tandem. To put it in a simple mathematical form, constants change. Being so, the underlying universe is changing and affecting all the assets all the same. One example of low correlation would be the stock market in general and gold. As we said previously, it is not only important to diversify, but to find low correlations as well.
What is there besides returns?
Beside returns there is also something very important. This side effect is knowledge. Knowledge that comes from investing is immense. Thousands of balance sheets, 10-Q and articles provide a great source of focused knowledge. That knowledge is sometimes biased through the media. Even biased, it allows the investor to “filter” and learn how to “filter” all that narrative white noise. Analysis of the ever changing stock market applies to all elements of life. Decision making and analytical thinking developed through investing is priceless. Great returns plus knowledge satisfy almost every aspect of human desires.
Advantages of investing are unimaginable. Knowledge, satisfaction, personal autonomy and responsibility are a few traits that embody investing. No matter the background, investing is a life learning process, and can be a lot of fun.
By Dominik Brkic