Money & Investing - Banks.com

Yesterday, I mentioned that we would look at investing help for beginners, following advice from The Four Pillars of Investing by William Bernstein. Get Rich Slowly offers a comprehensive review of the book; one that I found most enjoyable.

Pillar One: Theory of Investing

Bernstein mentions that it is important to understand how investing works. You should understand the fundamentals of whatever market you are investing in — whether it is the stock market, the FX market, the commodities market, the bond market, etc. You should know how the market works, and you should understand the underlying principles of all investing in general.

There are two main rules that I get out of this theory of investing:

1. The relationship between risk and return. The the risk, the higher your possible returns. However, this also means that your losses could be higher. It is important to understand that there is no such thing as a “safe” investment. And there is no “sure thing,” especially as possible returns increase. It can help to know your risk tolerance, and understand that if you want a smaller possibility of losses, you have to put up with smaller returns. No exceptions.
2. Past performance doesn’t always mean future results. Over at Blueprint for Financial Prosperity, there is an excellent post that addresses this very point. Just because an investment has performed well in the past, and is performing well up to this point, is no guaranty that it will continue to offer good returns. It is important to realize that the past does not set the future in stone. Make decisions based on current fundamentals, and how they are likely to affect the investment.

Finally, it is important to realize that “timing the market” is not actually possible. Get Rich Slowly points this out about investing:

Bernstein writes that there is almost no evidence that professional money managers can regularly pick winning stocks. (Warren Buffett is an exception.) There is absolutely no evidence that anyone can time the market.

Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions.

Tags: stock market, investing theory, investing blog, fundamentals,
risk tolerance, investments, FX market