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The Theory of Every Asset

Posted by siteadmin on Tuesday 12th of May 2015.

FB-Theory-300x251.pngPhysics is a more exact science than finance, and judging by recent Oscar nominations, it’s often more romantic and glamorous.

Stephen Hawking, one of the great minds of the 20th Century was one of the first proponents of unified field theory, or the theory that explained the entire universe.

So far a unified financial theory has yet to be created, but let’s consider the possible components.

Many of us are acquisitive, and we look to maximise profit and minimise loss in our day to day money management. We balance the need to acquire against the need to limit risk and this leads to a level of security we are comfortable with.

The one insight that is more useful than any other to the novice, or even the seasoned investor, is that their principal role, above all else, is to manage and to an extent, tolerate risk.

A strategy of investing for the long term as opposed to looking for short term higher risk investments generally provides more stability over time.

This is not a new idea particularly, but, as with all the most enduring scientific discoveries in the past, it doesn’t need to be, is simply has to make sense and to work.

Scientists like Stephen Hawking have often revolutionised how we see the universe in small steps, building on the achievements of their contemporaries and as Isaac Newton put it ‘standing on the shoulders of giants’.

A good investment firm with sound investment choices operates in a similar way, using the knowledge of experts in their given fields, to maximise return by investing in funds and minimise risk for the investor.

A well managed fund will seek to perform these two roles and make the investor’s money work hard so the investor doesn’t have to.

Therefore all investors have to accept a degree of risk when they purchase, but in return, the risk takers are entitled to a share of any rewards the accrue.

There now follows a statement that almost goes without saying, one which any investor with a modicum of common sense knows, but one which, by law, we have to reiterate:

“Past performance is not a guide to future performance. The value of stock market investments will fluctuate, which will cause fund prices to fall as well as rise and you may not get back the original amount you invested.”

Yes, the value of investments can fluctuate, it can rise and it can fall. It is for this reason that the many investors ensure they access financial advice on how to invest their money.

THE VALUE OF INVESTMENTS AND INCOME FROM THEM CAN FALL AS WELL AS RISE. YOU MAY NOT GET BACK THE ORIGINAL AMOUNT INVESTED