It’s not surprising that investing money and procreating (or just practicing) have a lot in common:
Some folks get a thrill from just watching…
Some avoid talking about it at all costs…
We like to know what other folks are doing… but it’s impolite to ask.
It requires practice and commitment to improving…
But when investing your savings with the goal of creating non-earned income and financial freedom, passive is almost always better than active (unlike sex which is almost always better if you’re an active participant).
The squawking heads on MSNBC, the emails from investment newsletter promoters, and the headlines on the covers of magazines scream about the prospect of returns for your accounts that “beat the markets” if you’ll only follow their system.
Why? Because it sells; not because it’s good for your net worth.
Two major reasons active investors (or the average trader) rarely if ever “beats the market” in the long run:
- FEES, FEES, FEES
The financial services industry runs on fees. They take them out of your savings at every opportunity. But, the more transactions you make, the more those fees take out.
- Consistently great active investors or traders are a rarity.
We love to hear the stories of that big score – George Soros has lived for 25+ years on his winning beat against the British pound back in 1992 – but it’s unusual, that’s why we keep telling it. Sure he’s won some (and lost some) since then but having a billion dollars to work with helps you get deals us individual investors will never be offered.
Though there are a few publicly available fund managers who are better than average investors and even the overall markets, most of their returns fluctuate and average out at or even below the general market growth especially after you deduct the FEES (see #1). Tactics that beat the market one year quit working when more investors use them so it gets harder and harder to consistently outperform the general market.
Lucky for us, the modern equity markets offer two ways individuals can avoid most of the downside of active investing:
- Exchange Traded Funds (ETFs) and
- Index Mutual Funds
Both, when used for consistent capital accumulation, offer relatively low fees and returns in line with the overall growth of businesses in the United States and internationally. And you don’t need to become an expert in picking stocks or even know a whole lot about business or economics to make and follow a profitable investment plan.
By minimizing your costs and capturing the growth in broad equity markets, your savings can turn into the capital that leads to financial freedom. Consistently adding to your capital via savings from your earned income, plus the returns from your investments, is a far more likely way to become wealthy than attempting to beat the markets with aggressive, high risk trading.
Don’t let your emotions, or a slick financial product salesman, trick you out of the wealth you deserve. Pay attention to the fees you pay for investments and get your emotional needs (and some thrills) met in the bedroom instead of risking your future financial freedom.
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