Investing is one of the best ways to grow your wealth and secure your financial future. If you’re like most people, you’ve probably heard more than one story about someone losing their shirt in a bad investment. Whether it’s a speculative stock, a hot tip, or a company that seemed like a sure thing you can and most likely will lose. David’s early experiences in investing taught him some hard lessons. He hopes that they will help you make smarter decisions as you start or continue your investment journey.
Learning the Hard Way in a Mining Town
In his younger days, David worked in a small mining town where speculative mining stocks were the talk of the town. These investments were risky, often with little more than a flashy company name to entice eager investors. He remembers vividly playing pick-up hockey with a group of fellow geologists. After each game, the locker room conversation would always shift to the latest mining stock everyone thought would make them rich.
He hadn’t invested in stocks yet at that point. He was a bit skeptical about it all. David was especially skeptical after hearing how people threw their hard-earned money into companies they knew very little about. David was often asked for inside information on the mining project he was working on.
“Hey Penna, is such and such company a good buy? You work there, right?” they’d ask.
He always answered honestly: “Um, no, I wouldn’t.” It wasn’t what they wanted to hear. Turns out, that advice saved a few people. Within a year, the company went under, and he was out of a job. But even with that caution, he wasn’t entirely immune to the allure of the so-called “hot stock.”
The Allure of Tarzan Gold
The big hit among the hockey guys was a speculative stock called Tarzan Gold—affectionately known as “Tarz Gold.” The name alone had a certain flash to it, which seemed to guarantee its popularity. The guys were constantly excited about their prospects, hoping Tarz Gold would be their golden ticket. David hopes they sold before it inevitably crashed. Unfortunately, like most mining stocks in those days, it was destined for a short-lived high followed by a steep fall.
A quick search on Google turns up no reference to Tarzan Mine, so it undoubtedly went out of business many years ago.
Unfortunately, he too got burned by investing in these speculative stocks. It was a hard lesson but one David’s grateful to have learned early on. He realized that speculation might look thrilling in the short term, but it’s not the path to sustainable, long-term success.
The Value of Sensible, Long-Term Investing
What David eventually came to understand is that investing doesn’t have to be risky, complicated, or exciting to be effective. In fact, it’s the opposite. The best way to build wealth over time is through low-fee, well-diversified investments. One of the best tools for this is exchange-traded funds (ETFs). They didn’t exist when he first started, but he certainly wishes they had. ETFs allow you to invest in a wide range of stocks or bonds without the need to constantly buy and sell individual companies. You get broad market exposure, often with lower fees than traditional mutual funds.
You can get global diversification with ETFs, meaning your investments are spread out across various industries and regions, minimizing your risk. These funds are designed to be held for the long term, and the fees are often significantly lower than other types of investments.
Let’s break down the key components of smart investing, focusing on what you can do to avoid the mistakes David made and how you can achieve real success.
- 1. Avoid the Hype: Why Speculative Investments Are Dangerous
The allure of making a quick buck is strong, and it’s easy to get caught up in the excitement of speculative investments. But here’s the truth: most of these so-called opportunities are high-risk and rarely pay off in the long run. Tarzan Gold is a classic example. At the time, it seemed like everyone in town was betting on this stock to hit it big, but very few understood the risks involved.
Speculative investments often come with little information, or the information available is overly optimistic, even misleading. A lot of people lost money betting on the next big mining company that never actually struck gold. If you don’t fully understand the investment, or if the company doesn’t have a solid track record, it’s best to steer clear.
Instead, focus on investments with proven performance, especially those that spread your risk across a range of sectors, regions, and industries. Diversification is your friend.
The current “hot stock” is crypto and David expresses his opinion in this article What is the Difference Between Investment and Gambling?.
- 2. Focus on Low-Fee, Diversified Investments
One of the biggest lessons David learned is that high fees can eat away at your returns. When he first started investing, he wasn’t aware of how much fees could impact his portfolio. Over time, even a small percentage in fees can add up to thousands of dollars lost. That’s why low-fee investments like ETFs are such a game-changer.
ETFs allow you to invest in a wide range of assets, including stocks, bonds, and commodities, without the need to pay high management fees. They’re passively managed, meaning they track an index like the S&P 500, so you aren’t paying for an active manager to pick stocks on your behalf.
The beauty of ETFs is that they are designed for the long haul. You don’t need to check the market every day or worry about buying and selling at the right time. Simply set up a monthly contribution, let the market do its thing, and trust in the power of compounding interest over time.
- 3. The Power of Compounding
Speaking of compounding, this is one of the most important concepts to understand when investing. Compounding refers to the process by which your investment earnings generate their own earnings, creating a snowball effect. Over time, compounding can significantly increase the value of your investments, especially if you reinvest your dividends and let your portfolio grow uninterrupted.Here’s an example to illustrate the power of compounding:
Imagine you invest $10,000 in an ETF that gives you a 7% annual return. In the first year, you’ll earn $700 in returns, bringing your total to $10,700. In the second year, you’ll earn 7% on that $10,700, or $749, bringing your total to $11,449. Over time, this growth accelerates, and after 30 years, your initial $10,000 investment could grow to nearly $76,000, without you having to lift a finger.
That’s the magic of long-term, low-fee investing. It’s not glamorous, but it works.
- 4. Stick to Your Plan, Especially During Market Downturns
One of the hardest parts of investing is staying the course when the market takes a dip. It’s human nature to panic when you see your portfolio’s value drop, but the worst thing you can do is sell in a panic. Markets are volatile, and ups and downs are part of the process. The key is to remember your long-term goals and resist the urge to make emotional decisions.
During the 2008 financial crisis, many people pulled their money out of the stock market, only to miss the rebound that followed. Those who stayed invested recovered their losses and then some, while those who sold at the bottom locked in their losses.
The best way to handle market downturns is to have a plan in place before they happen. Stick to a diversified portfolio, and if you can, continue to invest even during the tough times. Dollar-cost averaging — investing the same amount of money at regular intervals — means that you’re buying more shares when prices are low and fewer when prices are high, averaging out your costs over time.
- 5. Know Your Risk Tolerance
Everyone has a different comfort level when it comes to risk. Some people are more comfortable with the ups and downs of the stock market, while others prefer the stability of bonds or guaranteed investment certificates (GICs). It’s important to know your own risk tolerance and invest accordingly.A good rule of thumb is that the younger you are, the more risk you can afford to take because you have more time to ride out the inevitable ups and downs of the market. As you approach retirement, it’s wise to shift your portfolio toward more conservative investments like bonds, which provide a steady income with less risk.
- 6. Keep It Simple
Investing doesn’t need to be complicated. One of the best strategies for most people is to keep it simple. Choose a few low-fee ETFs that give you broad market exposure and hold them for the long term. There’s no need to chase the latest hot stock or time the market. The less you mess with your portfolio, the better off you’ll be.
Sensible Investing for Success
The path to investing success isn’t found in chasing after the next Tarzan Gold. It’s about building a solid foundation with low-fee, diversified investments like ETFs, sticking to your plan, and letting compounding work its magic over time. Whether you’re just starting out or looking to refine your investment strategy, remember: slow and steady wins the race. Sensible, long-term investing may not be as exciting as speculating on the next big stock, but it’s the best way to build lasting wealth.
Take it from someone who’s learned the hard way—investing doesn’t have to be risky to be successful. The best investment you can make is in your own financial future, and the earlier you start, the better. Keep things simple, stay the course, and watch your wealth grow.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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