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In this question: Is there a reason why someone shouldn't buy into a temporarily cheap currency of an otherwise solid economy?

One answer said "You're basically making a bet that the market is wrong".

Another answer said "You're betting against the experts that play the game. Why do you think you're better than they are?"

Another answer said "You are not the smartest kid on the block... smart people have looked at things, and using their risk profiles, have determined what they are willing to risk in terms of their investment in the Ruble, compared to other places. If you disagree with them, then invest now in the Ruble, and bet against those people who generally know the systems better than you".

All these answers make perfect sense. But, they seem to be true for any other investment. For example, there may be a stock which seems promising at the current price. But, there are experts who are much smarter than I am, and if they trade the stock at its current price, then they probably know that it doesn't worth so much as I think it is. The same argument is true for bonds, ETFs, real estate... virtually any other investment.

So, suppose I am not an expert, since I have a full-time job which doesn't leave me any time to read detailed financial reports of stocks and other financial stuff - it seems that the only logical conclusion is that I should stay away from investments entirely.

Is this true?

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Erel Segal-Halevi
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  • Look into technical analysis, if can be used in combination with fundamental analysis or by itself. – Victor Jan 10 '15 at 21:48
  • Tl;dr: it isn't hard for an amateur to get "market rate of return" over the long run, historically averaging about 8%. It is harder to beat that without increasing you risks and spending a significant amount of time managing your investments. And if you need the money back "soon", you're talking about speculating, not investing, which is a different game even though it's played on the same board and really is a case of playing poker against experts ... can be won but takes still more time and effort and some luck. More potential reward, more risk. Always. – keshlam Jan 11 '15 at 14:35
  • @keshlam - buy and hold is a form of gambling, because you are hoping the price when you need to sell is higher than when you bought, and gambling is all about hoping. By buying and holding for the long term without an exit plan you are actually increasing your risk, and most small time investors buy and hold without even considering the risk they are taking. If you have no exit plan and no risk management employed you are basically gambling, no matter if you are trading short term or a so called buy and hold investor. – Victor Jan 12 '15 at 01:43
  • @keshlam - do you consider 1 to 2 hours per week managing your investments too time consuming? And by having an investment strategy, exit plan and employing risk management you actually reduce your risks for potentially higher returns. – Victor Jan 12 '15 at 02:22
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    @Victor: I'm spending about an hour a month, if that, and doing quite well enough... as in average over 11%. The index funds do most of the work; I just rebalance between them a few tomes a year... and even that is more attention than I really have to pay. If I was starting now i'd go with a target date fund and not even rebalance. "If it happens, it must be possible." – keshlam Jan 12 '15 at 04:50

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Currencies are a zero-sum game. If you make money, someone else will lose it. Because bank notes sitting in a pile don't create anything useful. But shares in companies are different, because companies actually do useful things and make money, so it's possible for all investors to make money. The best way to benefit is generally to put your money into a low-cost index fund and then forget about it for at least five years.

Mike Scott
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    So what happens if in 5 years or 10 years time or how ever long you plan on holding the index fund, the market crashes and the price of the index fund is lower than when you bought in? – Victor Jan 10 '15 at 21:30
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    @Victor During existence of S&P 500 the 10 year average there were 4 times that 10 year annualized return was lower then then 5% (2008-2011) and 15 year return started from 4.24%. Over 20 years period it started from 7.81% and 25 years period 9.28%. So if you are holding for more then 15 years I would find it unlikely. – User Jan 11 '15 at 03:06
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    @Victor: You wait until the market goes back up, of course. That's one reason many people suggest holding 6 months or so of expenses in cash or equivalents. Of course if that runs out, you may have to sell low, but as User points out, having that happen means you're no longer an average person, but a very unlucky one. – jamesqf Jan 11 '15 at 04:48
  • @User - I'm not talking about averages. If you had bought in 2003 and were planning to exit out in 2008, then you would be up the creek. – Victor Jan 11 '15 at 06:31
  • @jamesqf - you wait until the manket goes back up! That can take 2 or 3 years or longer - that is still an oportunity loss at the best, and what happens if you needed you money much sooner than within 2 to 3 years? – Victor Jan 11 '15 at 06:34
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    @Victor probably investing in stocks is not the best option in you have a low risk tolerance and not very long horizon. Even with this time horizon in worse known case (1974) you would loose 10% of principal with median total growth of 92% and best known case (1999) getting 351% back of principal, which seems a rather reasonable bet in many, though not necessary all or even most, circumstances - especially when balanced with other types of investments (say bonds). Buy yes, it always balance between risk and reward (as with everything). – User Jan 11 '15 at 08:45
  • @User - that is the problem, by buying and holding for the long term without an exit plan you are actually increasing your risk, and most small time investors buy and hold without even considering the risk they are taking. The S&P500 took over 5 years to get back to it's 2008 highs which was the same high from 2001. So if you had bought in the year 2001 you would have gone nowhere in 12 years, all because you had no exit plan and no risk management employed. – Victor Jan 11 '15 at 20:34
  • I'll go even further - buy and hold is a form of gambling, because you are hoping the price when you need to sell is higher than when you bought, and gambling is all about hoping. Again, if you were looking to sell sometime after 2001, you would have been waiting more than a decade to recoup your money. There is every chance that there will be an even bigger crash in the coming years, what are your plans to protect your capital? – Victor Jan 11 '15 at 20:50
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    Plans to protect capital are built into the diversification model. Risk/reward gets slowly shifted to preserving rather than earning as target date approaches. Though with people living longer afyer retirement, some focus on earnings remains desirable. All very standard, little thought needed beyond rebalancing to a new trade-off point once a year or so. – keshlam Jan 12 '15 at 05:24
  • @Victor Looking at the data from Wikipedia it looks like 10 year annualized gain for 2011 was 2.92% (33% overall). Adding additional 2 years it gives 58% overall or 3.9% annualized (assuming dividend reinvestment). Also if you hoped to sell in 2001 with 10 year plan you would have 12.94% annualized gain which doesn't seems very bad. With 5 years horizon you would 'only' have 10.70%. I'd like to see another gamble which gives such results in 'bad luck period'. BTW. I hope a car won't hit me when I go to work but it is all about finding risk/reward ratio and hedging the risk (having insurance). – User Jan 12 '15 at 07:03
  • @Victor If you take that view, then all investment is gambling, except for the very few index-linked government bonds available from AAA-rated countries. Any other investment can fail to hold its value. – Mike Scott Jan 12 '15 at 07:10
  • @MikeScott - no my point of view is that any investing or trading no matter what time frame is gambling without a plan which incorporates risk management. – Victor Jan 12 '15 at 07:21
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It depends what you mean by 'gain'. Over long period of times the market increases so using a blind monkey with a dart or index fund should be sufficient to get an average returns. The key difference is that changes in currency are close to zero sum game while money in equity or bonds is actually used for something (building a company etc.).

If you mean 'get above average returns' then you will likely get answers depending on person. If you think that markets are efficient then you won't beat the market consistently - over long periods the returns are likely to be no better then average - because of large number of 'smart people' trying to beat each other (and even them are likely to have below-average returns). If you don't think so then it is possible to get above average consistently - as long as you know how to beat those 'smart people'.

User
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    But markets are not efficient, that is why you have booms and busts, under priced stocks, over priced stocks, and why sometimes the market moves opposite to the way it is expected to move. – Victor Jan 10 '15 at 21:35
  • @Victor given that there are many proponents and opponents of EMH I included both cases (for example AFAIK at least one Nobel prize in Economy laureates during past 4 years). – User Jan 11 '15 at 03:00
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    Markets may or may not be efficient, but historically the market as a whole drifts upward at a long-term average of about 8% roi. Diversified investment and longer time horizons smooth out the bumps along the way, so you can pretty much ride that growth. It does require patience, time, and willingness to stick to a strategy (at least with most of your money) but it does work well enough to be a good choice. If you can find a better one, of course, go for it ... just remember that risk and reward tend to move in parallel; pick your comfort level. – keshlam Jan 11 '15 at 14:48
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No. As long as you are sensible, an average person can make money on the stock market.

A number of my investments (in Investment trusts) over the last 10 yeas have achieved over 200%.

You're not going to turn $1000 into a million but you can beat cash.

I suggest reading the intelligent investor by Graham - he was Warren Buffet's mentor

Calculus Knight
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Pepone
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