Question: Wilfred, I have been investing for many years already. I believe my approach is not speculative but through a proper asset allocation and buy-hold through long-term investment. However, I have been disappointed with my investments. I started in January 1999 after the Asia Financial Crisis which I believe was a good entry point because I was buying during the crisis. My portfolio did quite well within a few years only to suffered heavy losses due to the technology bubble. After the technology bubble burst, my portfolio appreciated by 100% for 5 years only to be decimated by the Global Financial Crisis in 2008 in which the market lost nearly 50%. As a result, I was down by -30% relative to where I started in 1999. I gave up and sold all my investments. As I looked back, I was horrified to discover that the market appreciated by another 100%. I have decided to buy property because everybody is making money through property.
What you probably described is the ‘traditional’ investment approach. First, traditional investment approach is backward looking in the sense it focuses on mean-variance optimization using historical statistics. Moreover, the focus in on asset class diversification (e.g. bonds, equities, etc). Typically, people would invest using x% in equities and y% in bonds depending on time horizon and risk profile. Unfortunately, the traditional investment approach tends underestimate the dynamic nature of the market. It cannot be assumed the markets are the same every year forever. Traditionally, volatility is used as a sole risk of measure, thus ignoring ‘fat tails’. ‘Fat tails’ are events which result in large losses occurring more frequently than assumed.
Perhaps, the best way to invest is to only invest with the money you can afford to lose. That is why your ability to take risk is so important.
By the way, your statement “I have decided to buy property because everybody is making money through property” implies you are suffering from representativeness. This is for another topic for another day.
Disclaimers: All persons / characters appearing in this Q&A are fictitious. Any resemblance to real persons, living or dead, is purely coincidental.
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