Principles of Investing

Lately, I am often reminded that the environment that we are in is different than it has ever been. We’ve never had to deal with terrorism of this kind, scandals of this magnitude and war all at the same time.

While I believe this to be true, I also believe that everything goes in cycles and what goes down also comes up. Try to remember that not long ago, the media, expert financial advisors, mutual fund managers and the masses all believed that the tech boom was different. Technology was the way of the future and there is no reason why the boom would ever end. Add demographics and the theory of the Dow 36,000 seemed infallible. I even took a trip to the library and searched headlines in 1998, 1999 and 2000 and it was amazing how bullish the world was. We were all riding a high that led us all to believe that this time it is different.

The same hype is happening today only the world is terribly pessimistic about markets and investing. Once again, we hear that this time it’s different. Today, the same masses and experts are concerned that markets could keep going down and for the first time in history we could see four consecutive years of negative returns.

At times of such uncertainty, confusion and complexity, I think it is an opportune time to talk about the principles of investing. Remember that principles are timeless and regardless of the environment, principles always hold true. These principles have stood the test of time and regardless of the newness of the current events, these principles have survived every ‘unique’ event in history.

  1. Diversification. The old saying goes that you never keep all your eggs in one basket. In the investment world, spread your investments among different assets, geographic regions, management styles, and sectors and you will minimize risk of being overexposed in the wrong investment.
  2. Understanding risk. It is risk that determines performance and not the other way around. Far too often investors place too much emphasis on performance, and as a result they wind up chasing the latest fad only to find they jumped on the bandwagon a little too late. Take the time to understand your risk tolerance and also take the time to assess the risk of the investment before you buy.
  3. Dollar cost average. Dollar cost averaging helps you to invest systematically. For most it is important because it creates forced savings. By investing a sum automatically every month or every paycheque, investing becomes a regular habit. The second benefit of dollar cost averaging is that it helps you to lower your average cost. In times like these, systematic investing helps you to buy more units when prices are low. Finally, dollar cost averaging helps you to minimize the risk of bad timing in the short term.
  4. Employ patience. You have probably heard that investing should be long term and for the most part, that is true. However, it is important to distinguish between time and patience. Often, the enemy for investors is not lack of time but rather lack of patience. The fact is that investor behavior is a far greater determinant of investment performance than investment behavior. Too often our emotions cause us to lose our patience and as a result we usually sell at the wrong time when investments are down. One of the key principles to investing is to employ patience. I know that times like these are tough, as the markets are really testing our patience but if you can tough it out, the markets will come back.
  5. Develop a plan. Everybody needs a plan. As the old saying goes, “If you don’t know where you are going, any road will do.” Even if you know where you want to go, mapping out a plan will get you there more efficiently.

    Planning a trip is not too far off of planning an investment strategy. We must determine where we want to go and the best way to get there. Our personal needs and objectives will help us determine the most conformable route to take. Everyone has a different situation and thus everyone will have different investment needs. In turn, everyone’s plans should also be unique and different.

  6. Good research. One of my key principles in life is that good research leads to good decisions. Without question, this is true to investing. Too often, I see people making investment decisions based on a hot tip, the latest story, or intuition. I believe every investor needs to take the time to employ some research to ensure that investment decisions are founded on logic and discipline.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

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