When money expert Robert Kiyosaki published “Rich Dad, Poor Dad,” he shocked the world by declaring that investing itself is not risky. How could a practice that has destroyed the fortunes of countless investors not have risk?
Of course, investing does technically involve risk, which is why almost every investment advisor’s materials include some disclosure along the lines of “investing in securities involves the risk of loss.” However, Kiyosaki’s point was that the investing mistakes you make are what actually have a negative impact.
Buying your first real estate investment is an eye-opening experience for most people. You can spend weeks doing research, but avoiding oversights entirely is challenging. Perhaps you have budgeted for future repairs, thoroughly researched the neighborhood and studied projections for the local housing market. However, if you miss a key detail, such as a major construction project taking place nearby, your returns could take a significant hit.
This is why exhaustively researching and understanding your investments prior to purchasing them is critical. Not only will this help increase your confidence, but it will also help you avoid making further mistakes down the road.
Another example is in stock investing. If you invest for the long term using retirement products, then even investments that are usually considered risky can actually be tame. For instance, stocks have had positive returns in every 20-year period since 1928, which includes the Great Depression, according to data shared by NYU Stern.
However, that doesn’t mean stock investing is easy. Even well-diversified investors must prepare for their stocks to fall in about 27% of all years, according to that same NYU Stern data. Otherwise, when stocks decline in value, those investors could make behavioral mistakes that ruin their chances of success. As investing guru Benjamin Graham once said, “the investor’s chief problem — even his worst enemy — is likely to be himself.”
This is why knowing how to buy stocks isn’t enough — you must understand what makes the stock market go up and down as well.
Believe it or not, during the late 1990s, going to dinner parties with the wrong crowd could be a big investing risk. Some of the investors who lost big in the tech bubble were those who decided to invest heavily in internet stocks after hearing their friends talk about the incredible returns they had been getting. Similarly, stock investors who listened to the “Chicken Littles” in 2008 and sold all of their stocks may have missed out on the rebound that started in 2009 — as well as the S&P 500 index gain of more than 300% during the following bull market, according to StockCharts.com.
Fear, including the fear of missing out, can be hard to fight. This is why it’s critical to tune out most of the chatter you hear from other people.
If you’ve done good research, trust in it — not in someone who may not be knowledgeable, regardless of whether they know you and your goals. Whoever that person is, they aren’t you.
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