February 22, 2008, 7:00 am

The Sad Truth About Investing

by: The Financial Blogger    Category: Investment, Market and Risk,Trading
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After looking at all the investment solutions the industry is offering, all prospectuses and plans any financial institutions may offer, I realized a very sad truth about investing. Small investors cannot really hope getting steady two digits returns. In fact, they will be lucky if they get a +15% for one year. The worst part is that it is not the fault of the financial institutions. Small investors are usually not made to invest plain and simple.




Some of you are probably reading those lines thinking “well I’m a small investor and I made double digits returns more than once, what’s his problem?”. Bear with me for a few more lines and you will understand my thinking.


Small investors are fairly conservative in general. The problem is not that they do not want 10% returns every year. The problem lies within their deepest fear of loosing everything. They are usually not ready to take a -15% hit in order to get three consecutive years of +10% and more.


When you look at the S&P500 or the TSX over the past 50 years, you will find out that it seriously dropped a few times. This is exactly what small investors are afraid about. Since they have limited knowledge of the market, they tend to think that the market will drop down to 0 every time they see market fluctuations.


They will most likely sell everything when the market is at the lowest point or simply invest in more conservative investment solutions. Unfortunately, conservative portfolios will do 5% to 7% at best. On the other side, they should technically never show a negative 10% return.


I am writing this post for small investors that might have a plan done by a financial advisor with 10%,11%,12% projected annual return. If a financial advisor is predicting such high annual returns, ask him to show you the price history of his mutual funds. He is probably not lying to you, but he might not tell you about the market fluctuation within your investment horizon. You can go -20% and then +51% from one year to another and it still makes an average of 10% for two years. However, your heart may not survive the rollercoaster if you are a more conservative investor.


For those who are making good returns without a fortune, it could be related to your good financial knowledge or your high risk tolerance. Unfortunately, small investors usually lack both of them and this is why they turn to financial advisor to advise them.


I think it is actually to good thing to do. However, you should never follow one’s advice blindly. Ask question and be sure that you understand where you invest your money. This is the most important part about investing.



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I agree with you in general, that retail returns of a small part-time investor would likely be small, but I disagree that it has to be or should be. I believe it is a skill that can be developed. I would make a bad doctor, unless I practiced to become a good doctor! Same thing with investing … if I invest in the “market” then I probably shouldn’t expect to beat the market unless I commit to practicing until I do.

The trouble with retail investing (back to banks again) is that you are buying banking products. Bank products transfer the risk to end buyer while keeping profits for themselves. MERs, commissions, margin interest, etc are always collected while very little risk falls to the bank. No doubt that small retail investors have little left.

The smaller, but sophisticated, investor may wish to make contact with up-and-coming companies and become an angel investor in an early stage firm. Or invest in real-estate. You can make over 10% quite easily but there has to be a little effort put it.

by: The Financial Blogger | February 25th, 2008 (9:43 pm)


Banks offer good product for small investors and they could make money without knowing much about investing (while banks will also make money at the same time with MERs, commissions, etc.). However, when you see people saying that they want to get double digits returns and they call you to complain because they end-up the year with -6%, they are simply not made to invest.

This is the sad truth about investing; people want all the return without risk and fluctuation… I wish I could find gold under my pillow 😉

[…] Financial Blogger presents The Sad Truth About Investing, and comments, “I realized a very sad truth about investing; Small investors cannot really […]

[…] The Sad Truth About Investing by The Financial Blogger […]

Unfortunately, there is a lot of truth in what you write. The bottom line is most investors don’t have a strong conviction in their investment plan and will jump ship when things go down. If you really believed in what you were doing, that is the time to be buying! I plan to include your article in my weekly carnival review this Friday.

Best Wishes,

by: The Financial Blogger | March 4th, 2008 (9:58 pm)

cool ! thx for the “future” link 😉

[…] The Sad Truth About Investing […]