Many people who think of the term “investing” only focus on getting QUICK returns which technically would put those individuals in the ACTIVE class or in the class of speculators. Speculation is by definition someone who is day trading or just betting that the price of a product, service, company or a stock etc. is going UP or DOWN in price in a certain amount of time. Speculators are hoping that they can make a profit based on the price movement of the asset. This is why most people will always LOSE money at some point in time with this mindset of TIMING the markets because there is just no way to predict with 100% accuracy what Mr.Market is going to do.
With this concept in mind, we would like to take a look at a strategy known as “defensive investing” and how it compares to the active investors approach. Which of the two approaches takes on less risk? This is the question that should be on every investor’s mind before they pick an investment strategy or plan and lay their hard earned money on the table to buy an asset.
Active investing versus defensive investing which is better?
When you first start investing it is important to know what your appetite for RISK is and how long you are willing to wait for a return on your money. Is your appetite for taking on risk HIGH or LOW? We have pointed out in the paragraphs previously that most people want a return right away, it’s part of our nature to want things NOW, which automatically puts us in the ACTIVE investing category and sets us up for losing money at some point because we fall into the trap of timing the markets.
It’s been proven that 96% of hedge funds won’t match or come close to outperforming the S & P 500 in a single year. The S & P 500 annual return is just 9% on average over the past 75 – 80 years. This means that ONLY 4 % of hedge fund managers will actually match or outperform the returns of the S & P 500 annually. To make matters worse when it comes to timing markets, these hedge fund managers do exactly that. They try to time the markets and sell assets to make profits. The assets they sell are usually more often than not, the same assets that are in your 401K plans for retirement.
The point is… timing markets simply does NOT work over a long period of time. It may work for a little bit but eventually you will LOSE to Mr. Market and these hedge fund managers are considered pros at what they do. So how on earth could the little guy or retail investor like you and I possibly win at this type of approach over the time span of say 30 – 40 years or the lifespan of your career?
How do we avoid falling into this trap of becoming ACTIVE investors right out of the gate, especially if you are someone who doesn’t like a whole lot of risk, not knowing what the markets are going to do tomorrow or a month from now and the idea of losing money really fast? It’s simple… you have to change your approach and switch to a defensive investing strategy. Benjamin Grahm wrote an entire book on this called the “intelligent investor.” He wrote the book over 50 years ago and about 99% of what is covered in the book still stands True today.
Part of this process of switching from Active to a defensive investor comes with understanding something about markets and how they work, understanding that your emotions are your own worse enemy and come up with a plan or get into defensive investments that have been proven to reduce RISK and offer returns over longer periods of time.
Start thinking longer term as an investor!
Ask any “investor” if they have lost money throughout their career investing and more than 90% of the time the answer is yes. If they haven’t lost money then they are either lying to you, have inside information or are delusional. Everyone who plays and times the market wins some and loses some. We would like to emphasize how we used the word “investor” instead of a speculator because as an investor your return should automatically be justified by the fact that as an “investor”, your return should be somewhere on the horizon of at least 10 years.