4 Principles for Successful Investing
Updated: 5 days ago
When it comes to investing, we mistakenly focus on the things that we cannot control. We worry about the economy or market returns, and we overlook the fundamentals; what is in our control.
Each one focuses on an aspect of the investment that every investor can control. If you apply them to your investments, you will have more chances of success.
They are lasting principles; they are not outdated and endure over time.
Create clear and realistic investment objectives
An appropriate investment objective must be measurable and achievable. Success cannot depend on outsized investment returns or impractical savings and spending requirements.
The most common is long-term investment objectives (at least 10 years). Here are some examples:
Cover the university expenses of the children.
Maintain quality of life during retirement.
Achieve financial independence.
The best way to achieve a long-term investment goal is to clearly define it, create a detailed plan to achieve it, and accept a reasonable expected return.
Build a balanced portfolio (diversification)
We need to understand that return and risk are inextricably linked. We must inevitably take big risks if we want to earn big returns.
However, if you want to avoid big risks, you will likely get more modest returns. One of the main ways to diversify our portfolio is to divide our investments between different asset classes.
An individual investor achieves an optimally balanced portfolio when the mix of assets suits their risk tolerance and long-term investment objectives. Therefore, once we have decided on the asset allocation of our portfolio, it is recommended that we build the portfolio with widely diversified index funds to avoid exposure to the unnecessary risks that we incur when we choose individual stocks and bonds.
Markets are unpredictable, but the cost is not. The returns come and go; the costs are there forever. The lower the costs of our investment vehicles, the greater our share of their benefits.
Furthermore, extensive research has shown that lower-cost investments tend to outperform their higher-cost alternatives when invested for the long term. There is no reason to think that we will get better returns if we pay more.
But what we do know is that costs can negatively affect the long-term growth of our investments. The good news is that we can control costs by choosing the index funds with the lowest fees.
On the other hand, we can improve our results if the low-cost investment vehicle is tax efficient. An accumulation index fund is an ideal product from the fiscal point of view.
Since it's not distributing the dividends but reinvesting them in the fund itself, we defer the payment of taxes, and at the same time, we achieve these capital gains generated more benefits for us.
Maintain long-term discipline
Successful long-term investing requires a simple investment plan and enough discipline to stay the course, especially in bad times.
In turbulent markets, our emotions can play tricks on us. Some investors make impulsive decisions and end up deviating from the plan.
Others become paralyzed and cannot continue making their regular contributions and portfolio rebalancing when necessary.
We must have perspective and accept the uncertainty of the market. Knowing that the long-term investor will have to deal with more than one bear market will help us maintain discipline.
In conclusion, it can be said that the winning formula for investment with low-cost investment is as follows:
Identify our long-term investment goals.
Choose the appropriate asset allocation to meet our objectives, considering risk tolerance.
Select the funds that will be part of our portfolio. We can achieve great diversification and tax efficiency by investing through index funds.
Finally, having enough discipline to stay the course in the most difficult moments.