Investing for Financial Success - the 3rd principle...
Now we come to the 3rd principle of financial success – Invest, don’t Speculate.
(what are the 4 Principles of Financial Success)
The two primary emotions of investing (and speculation) are often fear and greed. Proverbs 13:11 tells us that if we “gather” (save) a little consistently over time it will grow. Then in verse 16 of Proverbs 13 King Solomon says, “All who are prudent act with knowledge”. For the investor, the assumption is that we prudently invest that regular savings with at least a basic understanding of how markets work.
Some of the basics -
Recent academic research indicates that markets over time will not reward you for risk that can be effectively diversified away. Think of diversification as not putting all your eggs in one basket. They won’t regularly reward “speculative” investment activity (for example trying to time the market) or concentrated positions (in other words putting large amounts in one particular stock) that often are a result of a get-rich-quick attitude. The research also indicates that our stock market is essentially an efficient market system, one where all known information is rapidly assimilated and reflected in the current price. Think of it this way, by the time you hear the news, it’s likely so has majority of the other investors out there.
Successful investors know that if they can capture market movement over long periods of time their investments will grow (stocks as measured by the S&P 500 have produced an average annual compounded return of 10.37% over the last 30 years). At the same time we know that markets move both up and down. It is the prudent, knowledgeable investor who knows that there will be periods of negative returns that must be endured to earn the full market return enjoyed by most successful investors.