The 6 Fundamentals of Intelligent Investing
In my experience; the majority of people I work with for the first time have generally ignored the importance of financial planning and goal setting and as a result have either taken unnecessary or inappropriate risks with their money, and with bad investing decisions have failed to diversify their portfolios properly and are generally paying too much in fees and charges. All of which combined lead to poor investment returns.
The good news is that you can have a successful investment experience if you are prepared to change the way you think about investing and take advantage of the combined wisdom that many Nobel Prize winners have acquired over the past sixty years. You will gain a better understanding about how money works, lose your fear and be confident that you are investing prudently and making smart financial decisions by sticking to these 6 fundamentals.
1. Choose an Appropriate Professional.
- Is unbiased and fee-based.
- Is professionally qualified.
- Has an investment philosophy and is able to articulate a clear set of beliefs and methods, and
- Uses a third party custodian to protect your money.
2. Understanding the Importance of Asset Allocation.
- Remember that risk and return are related.
- There are no such thing as low risk high expected return investments.
- The primary driver of investment returns is risk, specifically the riskiness of (and the relationship between) the asset classes in your portfolio and how you allocate your money between them.
3. Understanding the Importance of Diversification.
No doubt you have heard the cliché “don’t put all your eggs in one basket”, when it comes to intelligent investing it rings true.
- Once you know your investment goals, diversification helps to reduce the risk levels in your portfolio once you have determined the level of risk that is appropriate for you, and
- Proper diversification allows you to focus on the overall performance of your portfolio rather than the returns of its individual components.
4. Understanding the difference between Speculation and Investing.
Active v’s Passive Investment Strategies. While there are numerous debates over which style of investment is best and each has its own camp of followers or detractors.
- The truth is that no one can reliably predict the future and there is overwhelming evidence that market timing in general is a losing proposition.
- Active managers always underperform passive managers and statistically over a 15 year period only 19% of funds outperformed their benchmark and even at that it is hard to determine how many actually made any returns after fees and charges were taken into consideration
- Markets work because no single investor can reliably profit at the expense of another.
- Costs matter! When the focus is removed from performance and is placed on costs there is immediate value to your portfolio.
- Passive investing aims to make market returns and usually at a much lower costs than active.
5. Understanding the Importance of Rebalancing.
- Rebalancing is important to keep the allocation of your assets in line with your allocation targets.
- It keeps your risk level stable.
- A rebalanced portfolio has higher average returns.
6. Understanding the Importance of Discipline.
- Be prepared to accept uncertainty and stay the course.
- Drown out market noise as reactions can seriously hurt your returns.
- Focus on what you can control (Costs, Asset Allocation and Diversification) and forget about what you can’t control (Market Noise).
Whether you have €50,000 or €5,000,000 to invest, all of the above will help steer the investment odds in your favour leading to a successful investment experience.
If you are looking for impartial, unbiased, professional financial advice we would be delighted to hear from you.