Your Savings and Investment Decisions

There are two basic forms of investment you can choose from:

-Passive 
-Active

By these words I mean that YOU are going to be passive or active. Not that you are going to choose and actively managed investment fund. Usually those have very high fees and perform in the long term just like the average. In short: choose to pay someone to actively manage your money and you’ll end up with below average returns cause of the high management fees.

This is a question of putting all your eggs in the same basket and guarding it very closely. Or spreading your eggs around so that they are not all in the same basket should the shit hit the fan.

For the passive for you should thus choose a very broad mutual fund with the lowest possible management fees. There are plenty of “world-funds” that try to mimic all investment imaginable. Stocks, bonds, commodities, real estate etc. You will probably be able to find such a fund that charges you below 0.3% of the capital per year.

For the active you should yourself choose your investments and follow them closely, and preferably manage them. Do you have any special competence that gives you an edge over other investors? Maybe you are a journalist reporting on cars. Then you know cars intimately and maybe you can pick auto stocks better than the average person. Maybe you work as a salesman in a shoe store and have special understanding of what kind of foot wear consumers prefer. Then you could choose between sports equipment stocks.

If you do not have any special competence, which gives you an edge over other investors, you should put all your money in the passive investment.

You should optimally combine these two to spread your risks. I hate to break this to you but almost all people overestimate their ability to make good investment decisions. Therefore, I think it’s best to out 75% of one’s investments in the passive form and only 25% in the active form. I’m sure you will not follow my rule of thumb.

But consider two things:

1) The up and downs in a passive form of investment are inevitable. You have to remember that you are investing for the long term. This means at least 10 years, possibly 20. The world economy has expansions and contractions. A normal business cycle is 7 years. So to get anything like the normal average return of 6% you have to stay in for at least two cycles. That is 15 years.

2) If you think you have special understanding of a market, scrutinize this assumption carefully. Where did you get this knowledge? Exactly of what does it consist? Do others have it?

You should also write down your considerations for your decisions carefully in a trading diary.

Good luck with your investments.

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