Sometimes I like to browse Reddit Investing to see what financial events people are currently discussing or if there are any interesting questions on the front page. Recently I came across someone asking how to get high yearly returns. He was asking for suggestions on which stock to buy to get high returns. And says he is okay with taking on high risk. He then proceeds to ask if he should buy the stock of Visa and if he will be able to get 20% – 30% returns just by holding it till next year.
I was just shaking my head as I was reading what the poor soul was asking. But it is so common to see this online. People asking, “What can give me quick returns? I am okay with taking on high risk.”
Disclaimer: I am not saying that Visa stock will not appreciate by 20% to 30% next year. Depending on the price you buy Visa at, there is a chance 12 months later it will increase by 20%. But here’s the thing, you need to figure out what is the price/signal for you to enter to get that 20% return. Easily said than done unless you know what you are doing!
Here are 2 rules you need to remember when investing.
1. The Amount Of Effort You Put In Determines The Returns You Get
I’ve always believed that if you put in the work, the results will come. I don’t do things half-heartedly. Because I know if I do, then I can expect half-hearted results. – Michael Jordan
If you want to be a better basketball player, do you think you can get better without practice? Even some of the most successful basketball players, NBA players, they are constantly working and improving their game all year round. They don’t think that, “Oh, I am in the NBA so I’m talented. My talent will be enough to win games.” Based on talent, they might win some games. But you are never going to win a championship this way.
Now if you want to get yearly returns that are significantly higher than what the average investor is getting, don’t you think you have to put in the work to achieve this?
You have to learn how to invest in individual stocks and how to pick stocks that have potential for growth. If you want consistent yearly returns above 20%, you need learn how to do your own investing. It can be through Technical Analysis, Fundamental Analysis or whatever strategy you are most comfortable with. Now this will take a lot of effort from you, there is a lot to study and learn. And you still have to experiment to see if what you’ve learnt works for you. But I have never heard of anyone getting 20% returns every year without putting in work.
Of course there is the other option of just investing in the index. Now it may sound boring but just investing in the index can give you pretty decent returns.
I learnt about ETFs recently and bought my 1st ETF about 5 months ago. As of now, the ETF has grown by about 15% from my entry price. Yeah, I know that it is not going to give a 15% return every 5 months (It’s more like 6%-9% a year over the long term)
Of course even for ETFs, I had to spend time to learn and research on what are ETFs and how they work. Because nobody would ever invest in something that they have no idea about right? (Please say yes) So there is always a minimum amount of effort you have to put in for your returns. But a “boring” investment like ETFs can give you pretty decent yearly returns as well. If you want more, well you know the drill. “The amount of work you put in determines the returns you are going to get.”
2. Always Protect Your Capital
Rule No. 1: Never lose money
Rule No. 2: Never forget Rule No. 1
– Warren Buffett
When you lose a portion of your investing capital, you need it to grow back by a larger portion than what you just lost.
Consider this case. You have $10 and you just lost 20% of $10 (20% of $10 = $2)
So you are left with $8. Even if you make back 20% of $8, you don’t have $10 again. (20% of $8 = $1.60) You only end up with $9.60.
In order to get back to $10, you need to make 25% on your $8. (25% of $8 = $2)
You need to make 5% more than what you lost. And this percentage grows larger and harder to achieve the more you lose.
You can see why it is important to protect your capital. If you are reckless with your investments, it doesn’t matter how much you make. The moment you lose too large a percentage of your investing capital, it will take you a very long time to recoup what you lost and get back to where you were before.
It is okay to take slightly more risk at time, but you need to make sure the payout is worth it. For example you are risking 3% for a 5x return if it works out. Risking 3% for a 15% return is a pretty good payout! But you have to check how often this works i.e. what is the success rate? Because if it is easy to get a consecutive string of losses in a row, you will need to consider if it is worth it.
Are High Yearly Returns Realistic?
High consistently yearly returns are achievable, as long as you put in the effort to learn and manage your risk and capital well. If someone offers you high yearly returns and that doesn’t require a lot of effort on your part, perhaps it is a good idea to ponder if it is too good to be true?
But I am glad to see most people online are taking the right approach. Asking how to start learning investing. What books to read or courses (Check out my course maybe?) to take. Regardless of what form of investing you prefer, you must start now!
The right path is never easy but it always pays off in the long term. Keep believing in your vision and keep working towards it!
As always thanks for reading and please don’t hesitate to share this article if you like it!
How has your investment journey been so far? Did it take a lot of effort or are you choosing a more passive approach? Are you happy with your yearly returns thus far?