Diversification, patience, and sticking to an agreed plan: When it comes to long-term investment, the principles are fairly simple. But as in any area of life that involves delayed gratification amid constant distraction, simple does not always equate to easy. There is always some temptation or event that risks blowing you off course.
Fortunately, we have the evidence of long-term market returns and the wisdom of many experienced investors to keep us on the straight and narrow. The media is often full of jargon about investments, often relating to passing fads or marketing hype around individual stocks, sectors or countries. In truth, the principles of long-term investment aren’t particularly complicated. But they’re not always easy to get right. Here are seven simple principles to keep in mind.
Seven simple rules of Investing
1. Forget trying to outguess the market.
The prices of securities in global markets represent the combined views of millions of participants. All the public information about those companies is already reflected in prices. So, instead of trying to second-guess prices, why not accept the collective views as fair and work from there?
2. Build your portfolio around the long-term drivers of return.
Big picture, what drives returns is your relative exposure to equities versus bonds. Within equities, large-cap stocks perform differently from small-caps, while growth and value stocks vary. Within bonds, your returns can vary according to your exposure to term and credit.
3. Spread your risk.
Diversifying across thousands of different securities, as well as different sectors and countries improves the reliability of outcomes. By doing this, you reduce idiosyncratic risk in your portfolio and ensure a smoother ride. And by spreading your risk, you’re positioned to reap the gains wherever they might occur.
4. Don’t drive via the rearview mirror.
Who and what led the market higher last year is no guide to what might happen this year. Chasing previous winners is a fool’s errand. The news is interesting, of course, but it’s not a reliable guide to what you should do next as an investor. (When in doubt, see rule 3).
5. It’s not all in the timing.
There’s a natural temptation among investors to try to time the market. What if I get out now and get back in when things settle down? What if I switch from value to growth or from bonds to stocks to ride the next wave? This rarely works out well. In fact, not even the professionals are much good at it.
6. Costs matter.
Constantly churning your portfolio according to what you might think will be the next big thing is an expensive business. The only people who make any money out of it are the brokers. Fees and costs are something you actually can control, and by keeping them low, you’re adding to your own bottom line.
7. Stay disciplined.
Be true to what you decided in your most clear-headed moment. If you get too greedy when markets are up, or too fearful when they are down, you risk buying high and selling low. As anxious as markets might make you feel, sticking to the plan designed for you and rebalancing at regular intervals is a far better course.
Jason Kirk (CFP® Professional, SMSF Specialist Adviser, GradDip. App.Fin&Inv, B.Econ) is an Authorised Representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.