This is the first post in a series dedicated to the theme of the need to significantly increase investments due to the strong limitation or inability put in our financial life due to low income earning time deposits and other savings accounts.
In order to gain financial independence, we need to invest more in the medium term.
What we save goes mainly to savings accounts and time deposits. We don’t save much, and we have few savings. We don’t want to lose money. We don’t take any risk. We prefer a low interest rate with very low risk to better more volatile returns.
The problem is, when we do this, we lose. Most of the time, the interest rate paid on these placements is not even higher than inflation. It means we’re losing purchasing power.
So, we must invest. We need to invest. We must look for higher returns. If we want higher returns, we must take more risk. There are no free lunches here.
However, if we do things well, we achieve higher returns with moderate and acceptable risks. Especially if we invest in the medium and long term.
And why not? Why the obsession with making short-term placements, at 3, 6 or 12 months? If we see things well, usually we renew these placements. We keep them not for months or even a couple of years, but rather for many years. In some cases, a few decades. We renew them because we only need these savings much later. Usually and largely it’s for our retirement. Or for our children education. Or other medium- and long-term financial objective.
Therefore, it is already worth taking the risks of financial investments. With many years ahead we can invest largely in stocks markets.
Not in individual shares, but in the global stock markets.
Investing in individual stocks is only for those who know or for those who think they know. If they exist, they are very few and would be very rich and well known. In this case the best decision rule is to ask ourselves if we are capable to do stock picking well enough. Have we had good results in the past? Better than the market returns? It is proven that individual investors have much lower returns than those of the market. Even the great majority of professional investment managers can’t beat the market.
The good news is we don’t need to do it. Selecting investments or investment managers is a risk (more than a job) that we can avoid. Why put all the eggs in the same basket? The main stock markets provide returns of around 8 to 10% per year which in real terms means 5% to 6% (even bond markets generate real returns of 1% to 2%).
This should be more than enough and make us happy.
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