Contemplate losing money to make money

With the ASX 200 up 10% in November alone and the Dow briefly cracking 30,000 points, investors seem “off to the races” (okay, perhaps that’s a bit premature!). Awash with liquidity and enthusiasm for finding the next Afterpay, the risk is very much “on”. Given the year we’ve just had, you may well wonder what 2021 has in store.

I’m currently reading ‘What I learned losing a million dollars’ by D. Paul and B. Moynihan, which Nassim Taleb calls “the best non-charlatanic finance book I know”. Given the title, you can understand why the authors resorted to self-publishing. 

But that only makes the point: investors spend too much time thinking about how they’re going to make money and not enough contemplating how they might lose it.

At APN Property Group , we spend a lot of time thinking about how we might lose money. In fact, it’s step 1 in our investment process. Every investment offers the risk of losing money. We like to consider how we might lose it, and how much.

This is easier said than done. Contemplating losses can feel like a trip to the dentist - it’s just something that we’d rather avoid. But it’s also a (painful) investment in the future. Involving yourself in the psychology and experience of loss, even before it happens, will almost certainly make you a more successful investor. I think deep down most of us recognise this.

The issue is in actually doing it, which is why I’ve included two simple charts below. Both illustrate a couple of perspectives on the impact of losses on longer-term wealth creation. The conclusion is obvious but easily forgotten at a time like this - we all need to accept some losses, taking the risks we can afford to take, in order to build wealth over the years.

Dividends and distributions are a bigger part of that than many investors realise. 

Through the ‘magic’ of compound interest, distributions can seriously move the needle on your wealth – and potentially put you ahead of where “safer” investments might get you. That’s another truism that gets lost at times like this.

Best of luck investing in 2021 from our team at APN Property Group!

One thing investors can't ignore in 2021

The above wire is part of Livewire's exclusive series titled "The one thing investors can't ignore in 2021." The series will culminate in the release of a dedicated eBook that will be sent to readers on Monday 21 December. You can stay up to date with all of my latest insights by hitting the follow button below.