info@srisharada.net

tech

Home / tech

Can you protect your money?

2024-04-24

Can You Safeguard Your Money?

In previous articles, a fact was mentioned: to become wealthy, we must accumulate assets!

**Assets**

Assets refer to things that can continuously appreciate in value and provide you with passive income.For example, houses, shops, and also the high-quality company stocks or funds that you hold. They can bring you value-added income every year, and these all belong to assets.

Work hard to make money, turn money into assets, and then let the assets compound to form more assets, making money for yourself, which is commonly referred to as passive income.

In the past few decades, for most people, the two types of assets with the best value-added effect are real estate and stock-type assets.Firstly, let's talk about real estate investment.

The entry barrier for real estate investment is relatively high, and its investment attributes have been continuously declining. The era when you could buy a house blindly and watch its value rise is over.

Subsequently, houses with appreciation potential will only continue to concentrate in large cities, which leads to an ever-increasing investment threshold.

Advertisement

Therefore, investing in real estate is clearly not suitable for most people.

Now, let's look at stocks.

Investing in the stocks of high-quality companies itself has a certain threshold. Moreover, the future of a particular company is difficult to predict.Most people do not know how to analyze the fundamentals, read financial reports, or judge industry trends. At the same time, due to a lack of experience, it is easy to lose money in the stock market.

 

Some people even blindly believe in the 10% high returns of P2P products, and in the end, they lose everything and have nothing left.

 

The above two types of assets have more or less some thresholds, so the people who come into contact with them are mostly middle-class and above.

 

Many people are aware of the existence of inflation and know that their money is being slowly diluted, but they seem to be helpless.

Can we only do this?

In fact, it is not the case......

 Index Funds

When an investor does not understand the ins and outs of a specific business, but is willing to become a long-term shareholder of the U.S. economy, they should seek extensive diversification. That investor should purchase a large number of stocks and buy them in installments. For example, an amateur investor who knows nothing can outperform most professional investors by purchasing an index fund in installments...1993. Warren Buffett / Warren Buffett

This was the first time Buffett publicly recommended a specific type of investment category, and he has also mentioned index funds many times in his letters to shareholders in the future.

It is also because of this that index funds began to enter the field of view of ordinary people.

But we also can't choose blindly, we need to understand more about index funds, understand its value.What is a Fund?

We usually buy stocks and bonds ourselves for trading and investment.

What is a fund?

The most common understanding is that you give your money to a professional investment institution - a fund company, and let it invest for you.

Funds are generally diversified investments. For example, if you buy a stock fund (or bond fund), this fund itself will contain many stocks (bonds).When you buy for yourself, you have to buy one by one, which is the difference.

Many people do not have the energy to diversify their investments in so many stocks or bonds, so they can buy funds and let the fund company help you diversify your investments.

So when we buy funds, it is actually equivalent to buying a packaged product, which saves time and effort for ordinary people.

Fund companies can also charge a small management fee, which is essentially a mutually beneficial thing.

In fact, most of us have bought funds, but we just don't know it ourselves.For example, Yu'e Bao, its main body is actually a money market fund, and Yu'e Bao is just a third-party platform.

It will give the money to the fund company, and the fund company will invest the money in products with very low risk and relatively low returns, such as bank deposits or short-term bonds.

Then, after deducting the fund's management fee, the earnings will appear in your Yu'e Bao.

What is an index fund?Index funds are actually a type of stock fund, which invests in a basket of stocks.

Taking the SSE 50 as an example, this index fund invests in the stocks of the 50 largest companies on the Shanghai Stock Exchange.

If you spend 1,000 yuan to buy this fund, it means you have bought the stocks of these 50 companies at the same time, which should be easy to understand.

As for the index, we can understand it as an average value, which refers to the average price trend of all the stocks in the fund we have purchased.

Through the index, we can clearly see the current and historical price fluctuations of this fund.Everyone should already have a basic understanding of index funds.

Our previous articles mentioned that achieving an annualized return of 10% or more through regular investment in index funds is not difficult.

Are index funds not subject to losses? They will definitely lose! But they will also definitely earn!

| Risk |

When it comes to investment, we must talk about risk.

First, let's understand how the principle of stock profits works?For example, I own a breakfast restaurant that has gone public.

The price of each share of my restaurant is 1 dollar, and now you have bought 100 shares of my stock with 100 dollars (the stock is sold in lots of 100 shares).

Later, my breakfast restaurant does very well in business and expands its operations, so the stock price rises to 1.5 dollars per share.

At this point, you can wait for it to continue to rise and hold it long-term to receive dividends.

You can also sell the 100 shares you have in hand to make a profit on the difference, and then you have made 50 dollars, and your investment return rate is 50% (50/100).This is the basic principle of stock profitability.

The future value of a company is difficult to predict, so investing in stocks carries a high risk.

The risk actually stems from two points:

1. Poor management of the company, leading to a decline in performance and causing the stock price to fall or even delist.

2. Black swan events in individual stocks, causing the company to go bankrupt or even delist.

For example, intense market competition, adjustments in national policy directions, or internal structural and strategic issues within the company can all lead to a decline in performance or even bankruptcy.For example, recently Luckin Coffee, which was involved in a financial fraud of 2.2 billion, was forced to delist.

So when investing in stocks, if you encounter the above situation, you may suffer losses, or even go to zero.

Let's take a look at index funds.

If you invest in index funds, we can effectively avoid these risks.

The main body of index fund investment is generally a collection of companies with leading industry scale and benefits.The leading companies in these industries are actually linked to the growth of our national economy. Investing in index funds is equivalent to investing in the future development of the entire country.

As long as our national economy continues to grow steadily, most enterprises will be able to develop positively, and index funds will rise in the long term.

Black swan events and individual stock explosions are also less likely to occur in index funds.

A company may be forced to delist due to poor management, financial fraud, or the boss running to the United States to make cars.

Indexes are usually selected according to a set of rules, which avoids this issue.For instance, the CSI 300 Index selects its constituent stocks by choosing the top 300 companies in terms of scale and profitability from the Shanghai and Shenzhen stock exchanges.

If any of these companies fail to meet the criteria, they will be automatically replaced with other companies that meet the requirements, ensuring the index remains viable.

For example, the Dow Jones Industrial Average, one of the world's oldest indices, was established in 1884, and all of its original constituent companies have been replaced.

Index funds are more reliable and secure than individual stocks, both for long-term growth and risk avoidance.Investing in index funds, is there really no risk involved?

 

I hope everyone will understand index funds from an objective perspective, as there will definitely be risks.

 

The rise of index funds is not a steady increase, but rather an increase within a range of continuous fluctuations.

 

In this process of rising, there are ups and downs, and the downtrend often lasts longer.

 

A-shares have a characteristic: the bear market is long, and the bull market is short.A-shares refer to the stocks of companies that are registered and listed domestically;

A bear market refers to the overall stock market that is in a long-term downward trend.

A bull market refers to the overall stock market that is in a relatively long-term upward trend.

Most of the time, A-shares tend to fall more, and for inexperienced people, it is easy to lose money.

They often do not understand the market patterns, and due to nervous emotions and blind operations, they sell out at the first sign of a short-term drop, ultimately leaving with losses.So, index funds are not entirely risk-free. Although we know they will rise in the long term, most people still cannot make a profit.

 

Because when facing short-term market fluctuations, most people find it difficult to remain calm.

 

What is the solution?

 

| Returns |

 

Investment still needs to discuss returns.The renowned American investment master, Warren Buffett's investment mentor—Benjamin Graham, proposed a method in "The Intelligent Investor":

Dollar-Cost Averaging, also known as the Regular Fixed Investment Strategy

The method of this strategy is to invest a fixed amount of money in a specific fund at a fixed time every time.

This may not be unfamiliar to everyone; this is the fund regular investment.

In the continuously falling market, if we persist in regular investment, we can continuously buy at lower points, effectively average the cost, minimize the loss, and when the market rebounds, we can achieve profits.Buying in one go, however, results in purchasing at the highest point, which prevents the reduction of costs and leads to significant losses. When the market recovers, it may only return to the break-even state without making a profit.

In actual operations, we may encounter situations where the fund first rises and then falls, only to rise again. Through regular investment, we can still achieve profits in this process.

It may take us 3-5 years or even longer to complete a full smile curve.

Although the returns from regular investment are quite good, we also need to be prepared for long-term investment.The practical operation of fund regular investment will be introduced in subsequent articles.

 

 

Comments