1 - Golden rules of investing

Abstract

This chapter discusses some golden rules of investing. Investment means savings, forgoing today's consumption for benefits in the future. The high rate of unemployment, virtual bankruptcy of the social security system established seventy years ago, and the fact that many institutional investors—from life insurers to pension funds—are under water see to it that a sound policy of investment is cornerstone to everybody's life plan. In all likelihood, individual investments will be the only solution on which he or she will eventually depend for a living. The chapter focuses on the motive for investment, including savings objectives and their risks. This is fundamental for both professional investors and retail investors. There exist general guidelines characterizing investments in equities. Institutional investors such as life insurance companies, pension funds, mutual funds (unit trusts), and other asset managers are in business to satisfy the investment needs of savers whose money lubricates the wheels of institutional investment activities. In fact, this interaction between professional and retail investors is a two-way street. Because individual investors use the institutional investors' services, they should themselves always be aware of how the latter work, which rules are driving them, and on which criteria or conditions their decision-making process is based. The management of investments is the management of money done under a variety of aspects: money as raw material commodity, expression of wealth, and accounting measure that makes it possible to judge the obtained results in a factual, documented, and objective manner.