Investing implies, at least, repayment of cost, in some form. That Genesis CD will never return the £15 you spent on it but it will keep your teenage son out of the house. Financially it implies a return in profit. That Rolling Stones LP you bought in ’73 for £1.50 will now go for £50.
Investing, then, is child’s play: stick all your money in a government gilt and skim of the (meagre) profits.
Most investors, though, want to maximise the profit they achieve whilst minimising risk. This is the skill to successful investing. In order to do this the average person will create an investment portfolio which will most likely invest in some form of a fund. A fund is exactly what it reads – it funds things. A fund is the collected capital of people who willingly invest their money into to it and expect the people who manage it to return a healthier profit than they themselves could manage on their own. This collective capital is then used to create a return. The fund managers can invest in another fund or loan their capital out at a premium or buy shares in a company that intends to make money.
Obviously an individual’s investment portfolio can do this, too, but in joining a fund you are spreading your money to invest in a myriad of portfolios. An individual investing in £1000 in 1000 businesses would never make money – the fees alone would cripple them. But a million people investing £1000 pounds have economy of scale on their hands.
This is the trick to investing: picking the right funds and balancing your investment portfolio. For most investors – the casual amateur – this will involve handing over control of their money to a financial advisor. This person or organisation will have training in financial matters and be more experienced in market performance than the average investor. They will also have access to more alternatives: hedge funds for example; which have stricter membership requirements.
For most people contemplating investing their primary concern is to secure a higher rate of return than they would otherwise achieve on their own. Their other prime consideration is to minimise exposure to risk. For this reason the average investment portfolio will spread the investors money between high and low yield funds, high and low risk investment and long and short term return.
The reliance on minimising investment risk can result in virtual negation of profit if handled poorly, hence the prudent investor taking their investment portfolio to the funds’ experts. Tenths of a percentage point may seem like small fry to the individual but taken across a huge fund – Jupiter for example – it can make a huge difference in return.
In developing an investment portfolio the person investing has taken the decision to put monetary return above non-financial worth. As such the serious investor must separate themselves from emotional attachment to any particular stock or fund. Money has no memory or feelings. You are not buying a bottle of fine wine to drink or show off, merely to temporarily own before selling at a profit. Emotional detachment is the key phrase for anybody investing.
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