10 Nov 2021

Some basic ideas of investing

  • Investing is just buying, holding, and selling assets.
  • Cash is a depreciating asset. Cash depreciates in value over time due to inflation. Other assets such as cars and buildings depreciate due to material depreciation.
  • Appreciating assets are a good investment. Depreciating assets are a bad investment.
    • Bank deposits are cash. They depreciate like cash, just as liquid as cash, and deposit interest is taxed like cash.
  • Price of your assets may change every day… or many times within a day. You don’t need to keep watching every price movement.
    • You don’t look at the current market value of your gold jewels or house every week. Treat your stock and mutual fund assets the same way.
  • Different assets have different behaviours. Understand your assets before buying them.
    • Will this asset appreciate over time, or will it depreciate?
    • How hard/easy will it be to sell this in the future, if/when I decide to sell?
      • Will I find buyers when I want to sell this in the future?
    • How will this asset make money?
      • For example, real estate assets provide rent, stocks pay dividends, etc.
    • How might this asset lose money?
      • For example, cars lose value to depreciation.
  • Diversification reduces risk. But it also reduces your maximum return. Another way to look at this is that diversification shields you from extremes, be it extreme loss or extreme profit.
    • It’s natural to want extreme profits while wanting to avoid extreme losses. Choose the right amount of diversification for your portfolio considering its benefits and risks.

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