5 Investment Principles for Success
Investing is a long-term wealth creation strategy. That’s why we advise to get started as early as possible. Let your money work hard for you for years to come! However, instead of beating yourself about not starting sooner, let’s discuss how you can be more successful in your investing.
Here are 5 important principles for investment success.
1. Invest for the Long-Term
The first investment principle in building wealth is switching off your “get rich quick” mentality. What happens to your investments in the short-term, in a day or afternoon, doesn’t matter in a long-term investment strategy. That is assuming that you have created a disciplined strategy in the first place. When you’re thinking of retirement or funding a child’s college education when they are born, you don’t want to get wrapped up in the daily dips and climbs.
Don’t believe me? Just take a look at this chart.
Source: Refinitiv • By The New York Times
What Is Long-Term Investing?
Everything is relative, but when we mention “long-term” we’re speaking about the better part of a lifetime, not a few months. Long-term is usually saved to reference decades but could be several years.
It is also important to recognize the difference between “trading” and “investing”. Trading is when someone attempts to time the market in the short-term, while investing is a long-term approach. With all of the noise in the media and places like Redditt, you will hear a lot of differing opinions with hot stock tips. I cannot stress enough the importance of ignoring these recommendations, as the people who are giving them have no insight into what is best for your investment strategy.
When creating and adhering to your investment strategy, you want to avoid:
- Chasing performance
- Trying to time the markets
- Reacting to short term market movements or headlines
Chasing Performance
Many people base their investment decisions on short-term performance. They look at whether something is down or up at the given time of purchase, instead of doing the research and looking at long-term indicators of success.
Another common mistake for new investors occurs when they have satisfactory results, but they compare those results to other investments that may have performed better. People will often get fed up and rework their investment portfolio based on a perceived lack of performance, only to regret doing so some years later. Investing is a long-term commitment. It is important to be in high-quality investments, but that does not mean trying to chase the latest hot investment.
Trying to Time the Markets
Trying to time the markets is a mistake because while you can read indicators, it’s impossible to predict the future. People often say they’re going to wait for the next “big dip” but who knows how long until that occurs. If you wait long enough, that so called dip may still result in higher prices than today. Again, building wealth and investing for the long-term is not about timing the short-term swings, rather it is about sticking to a disciplined, well-devised strategy.
Reacting to Short-Term Market Movements or Headlines
This is probably the one that is most rampant with the advent of the internet and pundits on platforms like Reddit. Investment headlines and tips go viral quickly but it’s likely that by the time you hear about them or read them in the headlines, the sharp investment profit opportunity is gone. Don’t fall prey to what everyone else is doing because it’s popular at that moment. This leads a person to buying high and selling low, which is a recipe for disaster.
2. Diversify Your Portfolio
Diversification essentially means “not putting all of your eggs in one basket.” However, there are different types of diversification. When you are properly diversified, if one of your investments does poorly, it will not leave you in financial ruin.
Diversification involves owning different types of assets as well as being exposed to different parts of the world. The U.S. is just one part of a much larger investment universe.
Asset classes: Asset classes refer to the types of investments in your portfolio. Examples of different asset classes include stocks, bonds, real estate funds, and cash equivalents. You can diversify on your own with a mixture of these items or you can choose a fund that encompasses a varied mixture within the fund. Each has a different level of risk and that’s what makes them a valuable part of your portfolio.
Geographic diversification: Geographic diversification is just like it sounds. It’s mixing your investments across the globe in developed and emerging economies. That way if one area of the globe is negatively impacted by war or other devastation, your entire investment portfolio is not at risk. Again, you can do this individually or through a mixture of funds that takes that into account.
This chart is a perfect example of why it is important to diversify your investments among different asset classes.
3. Be Strategic About Asset Allocation and Location
Asset allocation is about determining the appropriate mix of asset classes that you are going to own. For example, 60% stocks and 40% bonds. Asset allocation is one of the most important factors in determining the risk and return profile of your portfolio. Your asset allocation should be aligned with your risk tolerance, time horizon and what you need your portfolio to do for you.
Asset location refers to where you are holding specific investments such as taxable accounts versus retirement accounts. It may be beneficial to hold certain types of investments in certain types of accounts for tax purposes.
You may elect to use certain types of accounts to reduce your current taxable income and defer it to retirement or select to use a Roth IRA, where taxes are paid up front and not in retirement. This is another form of asset location. An investment professional can help you decide which is right for you.
4. Control Investor Behavior in Volatile Markets
It’s difficult when things go awry in the market not to assume the worst and want to bail out of everything that’s worth less than what you paid for it. However, investing should not be an emotional play. One must use logic and control the knee-jerk reaction to sell when things look grim. Instead, know that if you are in high quality investments that what goes down in value will likely recover when the market as a whole recovers.
That is the point behind diversification and asset allocation. An investment professional can help you find the level footing you need to ride out the volatility in the market. In the short run, there are always dips that feel much larger than they are in the long run.
5. Focus on What Can Be Controlled
When it comes to investing there are many things you can’t control such as PR problems with individual companies, the dips in the stock market, crop failures, and government instability. If you worried every time that you received news of any of these things happening, you would likely decide your piggy bank was the only true safe investment. While the stock market may not be one of them, there are actually many things within your control.
You can control things like portfolio construction, risk level, discipline and patience, savings rates, and withdrawal rates. A strong investment portfolio is constructed through various types of assets. For longer investment goals, more risk is appropriate because you have more time to recoup losses and grow wealth.
Investing also requires discipline to achieve desired outcomes. It’s tempting to put other things in front of your investment goals because you can enjoy them right away, but just as you need to safeguard your current health to help ensure longevity and a better quality of life in the future, you want to practice good habits now to help you live a better financial future.
Final Thoughts
True successful investment takes a steadfast mindset. You cannot allow short-term challenges or obstacles to deter you from your financial goals. Working with a financial professional can help give you the willpower and strength to stay the course. They can help you see when your proposed actions aren’t in-line with your long-term goals and help navigate through those difficult times. A financial professional is an ideal partner to help you stick to your goals and accomplish what you set out to do.
Schedule a call today to discuss your long-term investment strategy.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Jason Dall’Acqua, and all rights are reserved.