Welcome to Investing 101! This month we’re taking a step back to the basics of investments. Let’s delve into what investing is, explore various investment approaches, and uncover insights gathered over the years for a successful investment journey.

First off, why do people invest? Well, it’s not just about making money, although that’s a significant part of it. Successful investing aims to grow and preserve our wealth by purchasing assets that are expected to generate positive returns over time. These positive expected returns are also what distinguishes investing from gambling – gambling may be exciting and entertaining, and certainly involves risk, but the expected returns from gambling are negative.

Investing also serves to preserve existing wealth against inflation and to shift current resources from the present to the future, essentially involving a bit of time travel as we anticipate our future needs.

However, investing inherently involves many risks, notably market risk. Take stocks, for instance; their volatility exposes investors to the risk of loss. Yet, understanding market fluctuations is crucial. Even in years that end up strongly positive, at some point stocks will experience downturns. These drawdowns are normal and expected, even if their timing is not predictable.

Moreover, not investing also poses risks – primarily due to inflation. Over time, the value of money decreases, emphasizing the need for investment to combat this erosion of wealth. Fortunately, market data demonstrates that patient investors, especially in the stock market, have been rewarded with returns that have far exceeded the historical rate of inflation.

Now, let’s delve into some investment approaches. Many individuals and professionals attempt to predict the future for investment decisions, but such forecasts are inherently uncertain. Emotional impulses, tips, and media influences often sway investment decisions, yet these can lead to erratic trading patterns and subpar returns.

Rather than be whipsawed by the latest headline or market movement, it is preferable to have a well-thought-out investment philosophy, which serves as a set of core beliefs guiding investment strategies. An effective philosophy should be rational and resilient, providing a consistent framework even during turbulent times. For instance, passive investing or indexing, which involves tracking market indices like the S&P 500, offers a low-cost, straightforward strategy with historically competitive returns.

Building on this, insights gleaned from market research highlight the importance of embracing market pricing, diversification, and resisting the temptation to chase past performance. Academic studies have identified various factors driving returns, such as company size, value versus growth, and profitability. Diversifying globally across different asset classes and regions can mitigate risk and enhance returns, as illustrated by historical market performance.

Additionally, focusing on what’s within our control, such as crafting a comprehensive investment plan, minimizing expenses, and staying disciplined during market swings, can contribute to a more successful investment journey.

Ultimately, investing is not just about making money; it’s about intelligently managing risks, harnessing market insights, and adhering to a robust investment philosophy for long-term wealth accumulation. By staying informed, disciplined, and focused on our goals, we can navigate the complex world of investments with confidence and resilience.