Do you allow your gut, otherwise known as your second brain, to make the investment decision on your behalf?
Are you naturally a risk taker and thus you gravitate towards the stock market or are you conservative and hence look for safer investments like GICs?
I'm writing this article so you stop making investment decisions with your gut and let simple financial math show you how you should be choosing your investments.
I worked at Mapleridge Capital, a hedge fund, for 8 years. One of my many jobs was designing trading algorithms, aka black box automated trading done entirely by the computers. This is the land of the Quantitative Analyst, the rocket scientist. One of the sayings of these math nerds was 'the answer can be found in the numbers'.
Let's look behind the numbers and see if it makes sense for you to lock your money in a GIC at today's going rate of 1% to 3%.
If you invest a lump sum of $1,000 once and receive yearly interest you will end up with this:
Simple math shows that it is not worthwhile to invest your money in ultra conservative financial product that generate returns in the 1%-3% range because the money simply doesn't grow fast enough.
Factor in inflation and taxes and your safe investment actually loses purchasing power over 30 years.
Math has proven that you must avoid GICs when their yields are in the 1%-3% range because your money simply loses buying power over time. When GICs are in the 10%-12% then it's a different story.
The chart also shows that you should be aiming for long term growth in the 10%-12% range. So your mission is to find asset classes that generate those returns.
Stop following your gut and let the proper analysis of the current market environment dictate what financial products you should own.
Never EVER lock your money in any investment (guaranteed or not) when the rate of return is in the 1-3% range because you actually lose money via inflation and taxes and more more importantly, you lose the opportunity to make money.
Keep reading the articles on BehindWallStreet.com and we will teach you how potentially generate higher returns in volatile, UP and DOWN markets while controlling your risk so you can sleep comfortably at night.
There will be a day when you understand that volatile markets provide you with the best opportunity to make money in the markets.
The only reason why a financial institution is willing to guarantee your principal and sell you 1%-3% GICs is because they know they can safely generate investment returns greater than 1%-3% for themselves.
If you know anyone who is afraid of investing in the stock market and invests their money in GICs, do them a favor and have them read this article on BehindWallStreet.com. There's no reason for them to remain blind to the fact that their safe GIC is actually losing them money.
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By Joel Laceda - July 27, 2013 BehindWallStreet.com
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