What factors do we need to consider when investing?
Dr. James Martin
Owner and Founder of Dentists Who Invest and Videre Financial Planning Ltd
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Fundamentally we can actually distil the force that govern our success in investing down to 3 things:
1. Rate of appreciation.
2. Inflation.
3. Volatility.
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1. Rate of appreciation: This is pure and simple a function of time and increase in value. The more our assets appreciate and the shorter a time frame over which this occurs, the greater the rate of appreciation. The higher the better, however, we must counterbalance this, we must chose assets with a proven history of achieving returns. The more data the better in terms of having a proven track record.
2. Inflation: This is the floodwater that is constantly rising and attempting to drown out our portfolio value. The more this rises the more chance we may find ourself underwater. The whole idea is to chose assets that will outpace inflation or else we’ll never actually make any profits.
3. Volatility: Volatility has a few different academic definitions however it is in essence the amount an asset valuation varies around its mean over a given unit of time. The more volatile the asset the more we have to consider timing when extracting returns from the asset.
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The idea is to obtain the greatest rate of appreciation over the shortest amount of time minimising volatility and outpacing inflation by the greatest rate possible.
Of course there are a few more factors to consider but understanding that there are only three main forces at play is a significant first step.
I hope everyone found this useful.