Successful investing isn’t easy. If it was we’d all be cruising the Caribbean in our yachts. It’s not easy because there are so many factors that influence investment markets that are out of our control. Notwithstanding this, I’d like to talk a little about a few simple investment principles that I recommend all my clients follow. It’s not ‘rocket science’ by any stretch. It is, however, a really positive step to increasing the chance that your investment experience will turn out to be a good one.
Time in the market
Over the long term investment markets go up. Look at the long term performance chart of every asset class over a 25 year period and I’m sure it will have gone up in value. I’m pretty sure that the future will be no different. That is, I’m pretty sure investments in 25 years time will be higher than where they are today. Given what we know of the past and what we expect of the future, doesn’t it make sense to have your money invested for as long as possible? Sure, there will be periods where markets go down. That comes with the territory. But don’t worry about that. Forget about trying to ‘pick the bottom of the market’. It’s too hard. By the time you’ve realised that the market had bottomed it will already be on its way back up and you would have missed a good part of your long term return.
Dollar cost averaging
Dollar cost averaging requires discipline and courage. The principle involves investing a regular amount of money at regular intervals irrespective of how the markets are performing at the time. We all know it’s easy to get sucked in by over exuberant markets and start investing bucket loads of money. Conversely, if markets look ugly and you’re a bit spooked, it’s easy to pull back and not invest at all. Dollar cost averaging forces you to act against these types of emotions and reactions. This principle makes sure you don’t invest all you money at the wrong times (like just before a market correction!).Dollar cost averaging results in you buying more assets when they’re cheap and less assets when they’re expensive. Isn’t buying more when things are cheap and less when things are expensive a logical way to make money?
You’ve all heard the saying ‘don’t put all your eggs in one basket’. This is so true when it comes to investing. The different ‘baskets’ you chose from in an investment sense are cash, fixed interest, property, shares and alternative assets. As an investor, deciding how many eggs go in each basket is a very important decision. In fact, that decision will determine over 90% of your long term return. In financial planning we call this the asset allocation decision. Given that this decision is so important it is imperative that you stick to that allocation once you’ve made it.
Over time your actual asset allocation will look different to the allocation you decided upon at the start. You need to make sure you position your portfolio back to your starting asset allocation. We call this a portfolio rebalance. That is, you need to sell assets that are now over represented in your investment portfolio and you need to use the money to buy assets that are now under represented in your portfolio. This process requires discipline and courage because it usually means selling assets that have performed really well and buying assets that have not performed so well. Again, as I said earlier, isn’t buying more when things are cheap and less when things are expensive a logical way to make money?
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Please note: This blog post contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.