Social media is funny. This week I found again like 5 different strategies (of course perfectly “proven” strategies) or investment forms from random people.
One was about “studying the stock exchange” (to recognize and exploit patterns), one was “mining” (whatever the name of that thing was), and three other products were recommended I never heard of – and even if, I would have not mentioned here again (…and with something like 13% ROI, fixed secured withdrawal rate, blablabla). You get the idea. It was the overall classic form of investment porn.
So before you expect me to put MY perfectly proven investment (strategy) out there, here is the spoiler alert right away:
There is no such thing as an optimal, perfect investment.
And the reason for that is actually totally logical and can not be ignored. Any other statement about the opposite is nonsense. But we’ll get to that.
If you are a beginner and never dealt with finances, you may face two of these common financial dilemmas:
- Your finances are a chaotic mess.
- Your finances are basically non-existent. You have nothing now, and no pension plan for tomorrow (which is even worse than having nothing now).
If you are around the block for a while, you may have two financial dilemmas as well:
- How can you protect your investments best.
- How can you get the maximum out of your investments.
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Examining The Challenges
Interestingly, both dilemmas have something important in common: Whatever you choose to do next, you can NEVER be sure if the outcome will turn out just as you plan. We are all equal to this starting point. Everything the big investors do is subject to the same uncertainty we experience concerning the future. Justice as its best! The only thing we can all do is to try to make the best decisions. This leads to the split of the 1% (awesome decision makers) and 99% of people (not awesome decision makers), the 5% (great decision makers) and 95% (not great decision makers) and the 20% (solid) and 80% percent (not even solid) of people.
So, let’s just start with common sense here and with a rational mind: Can “studying the stock exchange” be a wise decision? Do you think in the 1% area are people who are “excellent stock-market predictors”? Do you think in the 20% of solid investors are „stock-market predictors“? I HIGHLY doubt that!
Stock-market predictors are more in the 80% (not even solid) category to me – sure, with the occasional one-time hitters. And that’s a first point.
Excellent, solid and good investing is not about one-time hitting, and if it is, it is a consequence of leverage you prepared for long time – or just luck (like discovering a new Microsoft stock).
But we all need to start at the first base (solid), and then maybe decide to move up to the 5% (great) or 1% (excellent).
What Is Optimal?
If you want to do your finances on your own and decide to finally leave that 80% of people who are not solid about their finances, you will eventually get to the point where you realize the more info you absorb, the more confused you get, and the more you get to know, the more you realize how much you don’t know!
My suggestion: With calm, small steps and with the first realization: An optimal investment does not exist. Don’t stress about it. Ever.
Why?
Let’s take a step back and ask ourselves: What does „optimal“ mean?
Optimal means: There is an A and a B and they fit together particularly well.
A puzzle piece fits perfectly into the corresponding environment it was made for.
SpaceX is now trying to optimize Starship after its explosion.
What have both examples in common?
It is consistency.
Every puzzle piece will always be in the same ‚optimal‘ spot, no matter how often you do the puzzle. Engineers at SpaceX will always stick to the laws of physics when improving the Starship. Every optimum is based on a clear and immutable set of rules. An optimum is bound on these rules.
And this is only logical: If it wasn’t you wouldn’t know how to „optimize“ something. You would have no environment to do the stress test. You wouldn’t even need one.
Maybe your sophisticated brother manipulates the puzzle in such a way, that the piece fits now on 15 other pieces. It’s possible, but quite unrealistic, however, in finances, such odd things are not unrealistic (for further discussion read my blog post about the Black Swan).
And here we are: Financial markets fluctuate. Laws change. Products change. This will be the case forever. There won’t be a perfect investment environment ever.
Within the financial world, we will never have this ’secure‘ and static environment. Buy-and-hold worked yesterday (strategy) and so was Bitcoin a successful investment about a decade ago (in hindsight). So in finances, you can only talk about „optimal“ investments in hindsight. And this distorts the perception, and creates confusion or false beliefs of tomorrows investments – especially beginners take these false conclusions from yesterdays winners and assume they are winners tomorrow, too (same counts for losers, by the way).
What yesterdays data provides are only patterns. You can go ahead (and should) take your conclusions from these patterns. But you should be extremely flexible. Investment philosophies like buy-and-hold are not to be treated as religion; neither should Bitcoin be treated as THE future.
Always Be Flexible
So an ‘optimal’ portfolio, set up by smart people, is aware of all that. Young investors can do strategically different things with their portfolio than “old folks”. Young investors have time on their side, for example. That means why should they try to make a metaphorical sprint if they only want to build a portfolio for retirement? People pass their 60’s can not outweigh their portfolio with risky investments – they would not have the time to recover any significant drops.
So, if you are a beginner, stop jumping right into specific products, solutions or strategies which may not benefit your lifestyle or your current situation.
The selection of products is the last step of a long journey. If you focus on a specific product right away, you narrow your view so much that it may become religious to you (Buy-and-hold, Frugalism, Crypto) – and hard to get away from it once you need to switch gears.
But this is a typical evil of our time, it happened to me too. Whether it’s a smartphone, a trip or an investment, we live in a product world. That’s why we are conditioned to immediately look for products that can solve our problem, right?
That being said, here are my todays book suggestions 🙂 (those are affiliate links to Amazon where you can buy these books immediately):
Charles Ellis „Winning the Losers Game“ (kindle), for the hardcover version click here
George Clason „The Richest Man in Babylon“ (kindle), for the paperback version click here
Ray Dalio „Principles for Dealing with the Changing World Order“ (kindle), for hardcover click here