I have USD5,000 in a bank but it’s just sitting there and not earning interest. What’s the best way for me to invest it? Ideally I would like to double that in six months. Any advice or options?
So you want to double your money in six months. Great! That means 100 percent return in half-year, which compounded annually is 400 percent return per year. I only know of one place where you can get that type of returns: a casino. But innately we know that investing is not about gambling. True, there are clear parallels between the two. Both call for you to calculate the odds on a given ‘bet,’ but it is foolish to regard them as one and the same activity.
Generally speaking, investment professionals believe there are four types of participant attitudes in the financial markets: savers, investors, speculators, and gamblers.
Savers are afraid of the market, usually because they don’t understand why markets go up and down. They park their money in low risk vehicles to protect it against inflation, usually in bank accounts and tangible real estate assets. In some emerging markets like Vietnam, collectibles like jewelry, and gold/ silver are also used.
Investors understand that markets can go down for short periods of time but that over the long run markets will grow and generate higher returns than bank deposits. Investors assume the risk of being “underwater” during the investment period, and are comfortable with it. They have a long-term horizon (several years) while investing and feel comfortable to buy “more of the same” even during economic contraction periods.
Speculators are consciously very aggressive investors and buy/sell in less than six months. Many even buy/sell on the same day, hour or minute. Some use borrowed money to leverage their positions in the market and try to outsmart them with the help of statistical techniques and other trading methods. Usually they end up making a lot of money or losing almost all. Speculators are aware of the high risk they incur and feel comfortable with it.
Gamblers are born-losers that participate in the market for the thrill of a big win, and usually end up losing all their money.
To summarize: now you are a saver (your money is “just sitting there”) and are considering becoming a gambler. Let’s look at both options. If you gamble in a casino you are playing a negativesum game. This is because the system is designed so that the house pays out less than what it takes in. On the other hand, stock investing is a positive-sum “game.” Since the Industrial Revolution began in Western Europe in the late 18th century, most of the world’s economies have witnessed an unprecedented increase in output. We are all richer today then we were 50 or 100 years ago. Over time, economies expand and companies increase their value. The aggregate gains made by shareholders must of necessity match the business gains of companies. So when you invest in the stock market you are actually investing in the economy.
My suggestion: become an investor, and understand that returns are obtained with discipline, patience, and over the long-run.
Bio: Afonso Vieira is an investment manager and financial planner. He is licensed by the Financial Planning Association of Singapore.