So far in my investing journey I have learnt many things and today I hope I can share with some other newcomers something very important when it comes to investing- emotions.
Emotions make us human, without them we would be cold, lifeless machines, but when it comes to investing, it appears emotions can create real issues for new investors (like myself).
I’ll give you my own example:
I have adopted a strategy of dollar cost averaging my index funds, allocation 3/4 to a target retirement fund on vanguard and the other 1/4 to another focusing on the FTSE 100. This strategy means;
A) I can hopefully reduce my average price per unit over time which will in turn increase my percentage gain
B) I take out the emotion of investing a lump sum. Today I’m down ~2.5% overall which for me equates to an unrealised loss of £10, but if I originally invested £10,000 as a lump that would be £250.
Let’s discuss these points further.
Point A allows me to take emotions out of the equation by allocating a certain amount each month to a named fund, if the price is down relative to previous purchase price (which means I have an unrealised loss) I can purchase units cheaper, if the price is up I have an unrealised gain (most of the time) and although I’ll be paying more for the same amount I’m sticking to my guns and strategy- “time in the market beats timing the market”.
Point B also allows me to take emotions out of the equation. Of course, after some time with dollar cost averaging the investor will experience unrealised losses as big as or bigger than this amount, 2.5% is nothing after all however by that time, they will have developed their skills and knowledge and be able to handle the situation better, rather than thinking “I should sell and avoid more losses” they may begin to think “I can hold and wait for it to recover, or buy more at this cheaper price”. Until that time, loosing £10 will seem insignificant in comparison to £250, but for new investors, the beginning is the most important, as a bad experience will likely cause you to turn your back on investing all together.
Point B applies only to index funds, individual stocks will need to be carefully analysed by the investor, and if the criteria by which they originally invested is no longer met, they should consider reviewing their position.
Now, giving this insight to new investors was not the purpose of this post, beginning a discussion on emerging “ethically friendly investments” was. I saw a survey the other day which found sizeable portions of people would consider these and 18-25 year olds would the most. (I’ve forgotten my source, it could be the FT weekend or Sunday times financial, apologies)
Whilst this seems like a great idea, and the right thing to do, it may not necessarily equate to financial gains. There seems a high chance, due to the fact so many of the users here are first time investors and in turn of a young age, they too would be all for ethical investments. Now I’m not saying I don’t want to save the world and actively invest money in companies that harm it (via indexes) - I’m merely suggesting that choosing funds should not be made on an emotional basis.
This is because emotions can hinder your gains, the same emotions that tell you to sell the moment your down a few quid might be the same ones telling you to buy a fund because it’s ethical.
Firstly, look at the funds history, does it generally outperform the S&P 500?* What is the management fee? I ask these two on the basis of A) this fund is a general benchmark and B) firms may attempt to take advantage of peoples good nature.
*Past performance is not an indicator of future results.
What’s everyone else’s thoughts? Can you see ethical funds dominating in the future? Personally I think ethical investments will become a lot more popular with time, fees will likely reduce because of this, as for performance I cannot say.
This is hopefully the first post of many, feedback and discussion is welcome.
Edit: I have just remembered Free trade isn’t really about index’s however I think the general points can be transferred over to stocks for ethical companies vs not necessarily ethical ones, and my assumption most people starting out will opt for index’s as a base rather than individual stocks.