Why investing is not a competition

Last month, Apple became the first $2 trillion US company. Despite the coronavirus pandemic and global economic meltdown, share prices in the tech giant hit $467.77 in mid-August, an all-time high that elevated its market value above $2 trillion.

It’s not the only company that has seen a stratospheric rise in value in recent years. It’s well-documented that Tesla’s share price has risen from around $45 in August 2019 to $445 in August 2020, and the American auto giant is now the biggest carmaker in the world.

Taking a less sexy but closer-to-home example, Premier Foods has seen their share price rise in value by more than 300% since the FTSE All Share hit the low point on 23 March. The company, whose brands include Mr Kipling, Sharwood’s, Bisto, and Batchelors, has been well-positioned to benefit from stockpiling and people cooking more at home during lockdown.

Had you bought the shares in March at less than 19p, you’d be happy today that they are worth more than 80p – a significant return for a six-month investment.

If you own any of these shares, then you’re probably feeling like a ‘winner’ as your investment has been hugely profitable.

Conversely, if you don’t own these shares then you may feel as if you have missed out. You may even have jumped on the bandwagon because you don’t want to be left behind.

The stock markets can often make you feel as if there are ‘winners’ and ‘losers’. Newspapers often report on funds that are ‘beating’ the market and highlighting ‘top performers’ as if they are Olympic medallists.

However, it’s worth remembering that true investing is never a competition. It’s not a race. And there is no star prize for doing better than someone else.

It’s not about ‘winning’, it’s about meeting your goals

So, if there are no winners and losers when it comes to investing, what does matter?

The answer is simple: all that matters is whether you are meeting your personal goals.

That measure has nothing to do with how anybody else’s investments are performing. All you need to know is whether you can pay for your child to go to university or help them onto the property ladder. Do your investments mean you can retire when you want to, and live the lifestyle that you want?

Seeing spectacular share price rises might tempt you into thinking that your goals would be easier to accomplish if only you invested in these firms. If the money you invested in Premier Foods was now worth four times what it was in March, achieving your goals would surely be a doddle?

Of course, things are not that simple. One word explains why: risk.

It’s precisely the thinking that you can ‘beat’ the market that tempted people into losing billions by placing their money with Bernie Madoff in the 1990s and 2000s. It’s the same motivation that led thousands of people to buy bitcoin back in 2017 before it crashed.

When it comes to Tesla, the car giant is now the most-shorted stock in the world. Huge numbers of professional fund managers believe that there is significant risk that the share price will fall. Indeed, Tesla’s share price fell from more than $498 to $330 in the eight days after 31 August.

Of course, not every strong-performing investment is a Ponzi scheme or a bubble set to burst but thinking about investing in terms of ‘winning’, ‘beating the market’ or ‘getting the best’ return is risky, for two reasons.

  • It’s always based on hindsight. People buy shares when they see how good past returns were and expect these to continue into the future. However, strong short-term returns are rarely repeated indefinitely
  • Chasing the ‘best’ investments means you’re likely to damage the diversity of your holdings. Tesla might have generated great returns over the last few months, but to achieve that you’d have had to invest in just one company. Exposure to one single share is extremely risky and leaves you vulnerable should that share price fall.

Be the tortoise, not the hare

We’d never recommend you invested all your money in Tesla. And even though we love a Cherry Bakewell, there’s no way we’d tell you to put your entire pension fund into Premier Foods.

Instead, we’re about helping you to meet your goals. By establishing your goals, and the steady returns you need to reach them, we can build a financial plan to support these aims and avoid getting caught up in a competition that you need to ‘win’.

Diversify your portfolio, use low-cost and tax-efficient products, and generate reliable returns. It may not be exciting – but remember who won the race between the tortoise and the hare.

Get in touch

Investing isn’t a competition – it’s about meeting your goals. To find out how we can help you, please get in touch. Contact us by email at info@blueskyifas.co.uk or call us on 01189 876655.