You’ve probably got a friend of a friend who knows someone who knows someone who bought Apple shares back in the 1990’s and is now living the dream.
Did that person make a good investment? Or were they lucky?
The answer is probably both but let’s explore what makes a good investment by breaking it down into a few parts.
What are you aiming for? How long do you have to reach your goal? What are you starting with? What are your current circumstances?
All questions that need answering and are going to vary from person to person.
If said Apple investor was a retired 80-year-old investing the last of their pension income for the year in to one company, it may have been the worst investment they could have made.
If said Apple investor was a 20-year-old working in the tech sector with very little responsibilities who had a spare £1,000 and could see the potential of the company, it becomes a much more reasonable investment. Still a very risky investment, however, someone who has a longer time horizon, is actively earning money and investing money they aren’t reliant upon to fund their lifestyle is better suited to a high-risk investment than our 80-year-old retiree.
Funds, shares and commodities all have a price you can buy them for. Those prices fluctuate up and down. Some prices can be relatively high one year and relatively low the next.
Invest in a house to rent out in 1995 and you probably got an asset that appreciated greatly in value over the next few years.
Invest in that exact same house during the peak of the housing bubble in 2007 and you probably saw a dramatic loss in your investment over the next few years.
Different prices, different investing results, same house.
Just because something has appreciated in value previously, doesn’t mean buying that asset now, regardless of price, is a good decision.
Holding on to that house from 2007 to now probably results in a net gain, however, some bubbles burst and never recover.
Examples of this would be investing in Japan in the 1990’s and Nokia in the early and late 2000’s.
Which was a better investment… Buying a fund that returned 25% over the past 12 months, mostly through tobacco companies, or buying a fund that returned 10% over the past 12 months, mostly through recycling companies?
The answer links back to your goals. If you’re investing to make as much money as possible, no matter the cost you’d pick the first option. If you’re investing because you want to use your money to help make the world a better place, you’d choose the second option.
Attitude to risk
We’re all as different on the inside as we are on the outside. Different people have different attitudes to life, different personalities and different wants and needs.
If 2 people look at their investments and both see a 10% drop in their investment, one may see it as an opportunity to buy more at a lower price whilst the other panics because their investment has dropped in value.
In this situation, the opportunity person may be in the correct fund whereas, the panicking person may be better off investing in something that has a lower volatility (something that shouldn’t bounce up and down in value by as much).
Hopefully, this short list of examples shows you how complex the question of what makes a good investment is, and the many different factors involved when attempting to answer it.
Bear this in mind when scrolling through social media sites like Instagram and TikTok. When someone says they’ve invested in the newest, shiniest thing and you should too, consider how your current circumstances may differ from their current circumstances (as well as their financial interest in you buying the new, shiny thing).
At Oakworth, we’ll help you answer a better question… What makes a good investment for you?
by Ross Megretton