Sunday, January 3, 2010

Your account size makes a difference

One of the lessons that I've learnt in 2009 is account size does matter.


Eg. Percentage returns in 2009:
Investor A: $20k account (50% return)
Investor B: $1 Million account (10% return)


Absolute returns:
A: $10k
B: $100k


A may be superior in % performance, but in reality the absolute return is not significant enough. One who earns 2K a month will be able to earn 10k in 5 months. A job is almost risk free unless unemployed. The effort put in between a job and an investment operation is debatable, which we shall not discuss here. The commission that A pays might also take up a meaningful % chunk of his account depending on how wide is the diversification.


B has an easier life. He need not stress about generating huge % returns because 10% return on his account per year is significant, assuming $8.3K per month for an individual is enough. Let me borrow this quote from Dream who sums it up better than me;


"Most people don't talk about it but the larger the size of your account, the higher the probability of success. It provides you with "a margin for error" if your investment turns against you. With a small-sized account, you are often compelled to take risk unsuitable for your account size."


Money in a bigger account compounds faster. Even if you lose 20%, you still have $800k to live with. With a $20k account, how many lots of DBS or UOB can you buy? One is often restricted to stick to mid or small cap stocks.


Strategies used between A and B may also be different. A may want to seek maximum returns possible during the shortest time, but B might be looking to preserve capital instead.


As an investor I believe that we always take opportunity cost and other risk factors into account. If the returns from your job is higher than from your investments, why go for meagre returns on a small account? Save up for a bigger account, use money that you do not need in the near future and do not risk money in something you do not understand.


Happy investing all! Cheers!


Ohh...forgot to add in. The best investment that one would ever make in a lifetime might just be yourself. I think Warren Buffett mentioned before haha...


Cheng

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