The investment mistake that is worth 2 years’ of salary
I see you, if you are:
- You are ready to invest but not sure how
- You have at least US$100 as initial investment capital
- You have no time or interest to learn how to analyse stocks or read companies’ financial statements (or you prefer to spend your spare time with your loved ones or your passion work)
- You are prepared to invest long term but you’re not sure how to profit from the market in the long run
- You may have lost some money investing in individual stocks in the past or you may
- You have 5 minutes each month to track and manage your portfolio
- You don’t really like the gambling or speculative nature of short-term trading
- You may have heard about ETF before but you’re confused about what that is (because there are literally hundreds of ETFs to choose from) and you don’t invest in what you don’t understand
If some of the above describes you, I understand you.
I was once very confused and don’t know what I can invest in to get stable reasonable return. I invest in “high yield” bond — thinking that’s my ideal tool to get high return plus stability and safety, because bond gives the impression that it is a safer investment than individual stocks.
If you understand the financial structure of a company, you would be laughing at me right now. Let me explain why:
Stocks — means that you own part of the company. In other words, it means you are lending money to buy a part of the business and you become an owner. Meaning your investment is subject to whether the business and company you invest in is profitable. If it is profitable, you share your reward (called dividend). If it is not profitable, you don’t get any return, and the price of shares you have (your ownership proof) devalues because a business that cannot generate much income is worth less. After all, a business’s valuable is largely depends on its profit. So when the business is not hitting its target profit or even making a loss, your piece of ownership becomes less valuable. That is one of the reasons when the company’s stock price falls and you cannot get your money back with reasonable, sustainable long term return.
In 2021 annual Berkshire Hathaway meeting, Warren Buffett shared a list of 20 stocks with the largest market capitalization as of March, which included Apple, Amazon, Alphabet, Microsoft, and Facebook etc. He asked the audience which of those stocks they predict would remain in 30 years.
No one can answer that of course.
Buffett then shared the top 20 companies by market capitalization as of 1989, among them some Japanese companies, Exxon, General Electric and IBM. He asked the audience which of those stocks they think have remained in 30 years.
The answer: none of those remain in the top 20 today.
“I would guess that very few of you would have said zero, and I don’t think it will be, but it’s a reminder of what extraordinary things can happen…..We were just as sure of ourselves, and Wall Street was, in 1989 as we are today. But the world can change in very, very dramatic ways. After all, a lot more to picking stocks than figuring out what’s going to be a wonderful industry in the future.” Buffett said.
That’s the difficulty of stock-picking, according to the most successful investor in the world.
Bond — when you invest in bonds, it means that you lend money to the company for specific purpose. A company can issue bond for a particular project or general operation or expansion etc. Anyhow, you are lending money (by investing in the bond) to the company for its purpose and the company promises to pay you back by a certain date (depending on the term of the bond). There are many kinds of bonds — each with different term of maturity from 1 year to over 25 years. Maturity is the event when the bond becomes payable to you. At maturity, the company should pay you back your investment (the capital you lend to the company) plus interest (as reward of your investment).
See where I’m going? You can only get back your investment and interest upon maturity. There are so many things that can happen prior to maturity — especially if you invest in mid term bond of 10 years or long term bond that can go over 25 years! The company can go bankrupt, or unprofitable etc. The world is a different world then and what could happen to a company when you buy its stocks can ALSO happen to a company when you buy its bonds.
Although, legally speaking, bond holders have the priority of getting the money back before shareholders in liquidation or in the event of bankruptcy. Nonetheless, when the company comes to the liquidation stage, it is already dead and you can imagine how much it could have left. Most likely, both bond holders and shareholders cannot get their investment back.
Therefore, investing in bond is NOT safer than investing in stocks (maybe a little bit safer in terms of priority but that “advantage” is negligible).
The same set of internal and external risks apply. The same difficulty of stock-picking applies (because you have to choose the company to buy its bond).
I really wish someone could set it out like this for me years earlier so that I won’t put all my capital investing in bond think thinking that is a safe, secure, sustainable, good investment that I can rely on to retire early. This one article here is worth 2 years of salary — if you are thinking whether investing in bonds would be safer or how to achieve safe, secure, sustainable, reasonable return long term, I sincerely hope that you won’t make the same mistake as I do.
From there, I learnt a lot and really started to build my portfolio from scratch. Luckily I learnt from all the mistakes I made and finally find a path to sustainable, reasonable return long term. Now, I own a 6-figure portfolio that is sustainably growing year by year and giving reasonable return 4–7% on average each year. This may not be “good” return for you but it is good enough for me to sleep well at night not to worry even when the market crash and it is stable enough for me to rely upon to provide sustainable withdrawal for early retirement or FIRE.
If you want to short-cut to long term investment success and avoid losing money or delaying retirement, check out this course here which will help you (I’m very confident because I have been there): https://bit.ly/3D3J1U6