Investing can be complicated, but it doesn’t need to be. The basics will result in outstanding returns.
We live in a world where even the poorest investor has access to easy low cost financial tools that previous generations could only dream about. You do not need to pay expensive fees, predict what will happen, which company will succeed, or expose your portfolio to excessive risk.
What does an ideal investing practice look like?
The ideal investment practice is diversified,
Implementing these ideals will differ slightly depending on who you are. As you become wealthier and more sophisticated the benefit of more s
Here are some basic principles
Diversification
Diversification is the only free lunch in investing. Risk and return are generally inversely correlated (as you reach for more return, you necessarily take on more risk). Diversification, however, can increase your returns while decreasing risk. You can diversify asset classes (equity, debt, real estate, land, commodities, alternatives) and also diversify within each asset class (by holding a basket of 30+ stocks vs only a few, or by slicing your choices into international vs domestic equities, large businesses and small businesses, growth and mature companies, etc). You can also gain exposure to other factors such as trend, volatility, profitability, etc.
Exactly how much diversification you need, what type, and how to best go about getting it is debatable.
Costs
Fees can drastically reduce your returns.
Luckily today there is a ton of competition for financial products and even the poorest investor has access to quality low cost investment products.
Probabilistic thinking
You do not need to predict the future. In fact, the only rational behavior is to invest in a way that respects the impossibility of knowing what will happen.
Behavioral finance
How will you behave? Any given investment strategy is only as good as your actions to implement it.
More than one way
There are many ways to invest. The right way for you will change over time as your investing knowledge increases, your priorities shift, and the opportunities available to you change.
Expectations
It is important to understand what is reasonable to expect when you invest. What is your expected return and under what time period? How much volatility will there be and how long might you underperform? Knowing what to expect can help you stay the course and prevent you from sliding towards speculative investments.
Investing vs Speculation
You may be tempted to reach for a higher return than what basic investing can provide. Although the classic textbook answer that the market is efficient and reflects all known information is perhaps wrong, it is unlikely that you are one of the extremely small percentage of investors that can beat the market year after year. The skill and discipline required cannot be understated.
If you are choosing individual securities without at least a strong academic understanding of what you are doing, you have no chance of consistently outperforming. Even if you understanding valuation as well as a finance graduate or Chartered Financial Agent, you are still likely to underperform index investing!
Be honest with yourself. Are you investing, or speculating?