Principles of Investing
Lately, the stock markets remind me that everything goes in cycles and what goes down also comes up. You hear a lot of different predictions, opinions and forecasts but really no consensus. There’s so many different investments to choose from. All this can lead to more confusion and anxiety. What should you do with your investment portfolio?
Today, the media, the masses and the experts seem to be concerned that markets could keep going down..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.
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.
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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.
Related article: The art and science of building a diversified investment plan
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.
Related article: 5 ways to measure risk in an investment portfolio
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.
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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.
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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.
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Watch the fees and costs.
As part of your investment research, it’s important to know all of the fees and costs associated with your investments. So many of the fees in the investment industry are embedded (which is another word for hidden) and as a result, so many people have no clue how much they are paying in fees or worse yet that they pay fees at all. Every investor should be aware of managmenet fees, front loads, back loads, commissions, trading fees, performance fees, etc. If any salesman tells you there are no fees, then run away! Every investment has some fees associated with it.
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