Have you heard the expression that something is ‘too good to be true’?
Lately, I have been hearing all sorts of conversations swirling around about Bitcoin, Forex and Day-trading. More often than not there is an excitement that verges on ‘get rich quick schemes’. Comments like this, “Did you hear that so-and-so just made some crazy sum of money trading Bitcoins?” This is often followed up with I something along the lines of, “I don’t really understand what Bitcoins are, but I just started trading too.”
Argh! You need to know what you are investing in!
If you can afford to speculate and play the game and see if you win, that’s your choice. If you think you can set up a secure financial future using these speculative games, then you’d better be prepared for the worst-case scenario of losing it all. The level of risk when investing on speculation is often far greater than the reward!!
We’d all love to take the magic pill to lose weight, to get rich and to be fit, but that is not really how it works. Slow and steady when it comes to weight loss, investing and exercise is the only way to achieve success for the long-term.
So how do you determine if an investment is realistic? The average annualized total return for the S&P 500 index over the past 90 years is just over 9%. That’s steady growth over the long term. Studies show that when investors try to beat the market in most cases they fall short. It’s better to aim to match the market.
What does that really mean? What does a 9% return mean for your hard earned money? The Rule of 72 is a nifty little guideline. Divide 72 by the rate of return (9 in this case) and that is about how long it will take your money to double. Your money invested at 9% will double in approximately 8 years. Here’s an example. If you invest $10,000 in an S&P 500 index fund, you could expect to have $20,000 in 8 years (assuming you reinvested dividends and you didn’t invest anymore). That’s how slow and steady wins the race.
If it seems too good to be true…it probably is!
You can get my guide on how to avoid the hidden costs of long-term investing here.