In a new and revealing book The Empowered Investor, Keith Matthews, a portfolio manager offers up some very practical advice after spending 20 years in the investment industry.
Here are some of his investment principles:
Principle 1. Realize that no one has an investment crystal ball including stock market strategists, economists, or financial advisory firms. Ignore predictions; they are one of your obstacles. Concentrate on executing and maintaining the winning strategies in your portfolio.
Principle 2. Behavioral finance has shown that investor’s emotions can have a negative impact on their investment results. Often hype found in the media, financial service literature, or even in social settings might entice investors to make investment decisions that they will later regret.
Principle 3. Asset class investing is the most important step in taking control of your investments, and has a bigger impact on your portfolio than market timing or stock picking.
Principle 4. Most investors and many advisors misunderstand the concept of diversification. They believe that because they own 15 stocks or 10 mutual funds, they are diversified. Too much overlap equals bad diversification. Improper diversification can be a recipe for disaster.
Principle 5. Discover and use the Fama/French 3-factor model when constructing and designing your portfolio.
- Stocks outperform bonds
- Value stocks outperform growth stocks
- Small-company stocks outperform large-company stocks
Principle 6. Execute your asset allocation with asset class index tools. All tools are not built the same. Build your portfolio and work with an independent advisor who is free to recommend the best tools in the market place (transparent, precise, tax-efficient and flexible)
Principle 7. Write an investment policy statement An IPS will keep you within your specified risk parameters and greatly enhance your investment experience.
Principle 8. Recognize that costs matter. Taxes, management fees, trading costs and investment advisory fees have an impact on your long-term investment results. Know your costs of investing.
Principal 9. Investments and life work together, and a well-considered plan is crucial to ensure that your dreams become a financial viability.
Principle 10. Get on with your life