1. Waiting is not an option
It won’t be the first thing on your mind when you’re in your teens, but the early bird really does catch the worm.
Thanks to the miracle of compounding (you earn interest on both the existing principal and the interest you’ve received), the younger you start, the greater your investing power. You also won’t have to invest as much money over a lifetime.
2. Equities are the only option to build wealth
When you’re starting out, knowing what to invest in can be daunting. Even if you’re not thinking as far ahead as retirement, whatever you’re investing for, the best strategy is to pick assets that consistently grow above the rate of inflation.
The only asset class that can do this over the long term is equities, which are shares in listed companies. Looking back at US asset prices, we can see that equities outshine bonds and gold by a wide margin. As a result, the only solution to build wealth over time is by participating in the productive capital: equities.
3. Do not speculate excessively
But where to invest? With almost 44 000 listed companies worldwide, being selective is a must. Some investors are swayed by sleeping giants, believing they might rise again, gambling that a previously successful company (or a whole sector) is due a comeback. But, financial markets are always evolving, thus investors need to be open minded about new companies and sectors.
Other investors look for the next big thing. This can also lead to problems. Investors can be tempted by ‘lottery stocks’ that create a lot of ‘noise’, make a quick profit, but quickly fade, while their prices plummet. So, how can you select your investments more carefully?
Instead of forecasting the next winner, it is easier to buy the current winner. Let others speculate about the future and give preference to investing with the current winner. And never try to predict the turnaround of losing stocks.
4. Invest with your head and not with your heart
So how do you know whether to bend with the breeze or break?
Investing requires a cool head. Too impulsive, letting your emotions dictate investment decisions, and you risk over- or underestimating a stock’s ability to make gains or recover. You’ll end up buying when the share price has peaked, or selling when it’s at its lowest.
In the past 30 years, all the gains in the S&P 500 have been made overnight and not during daytime sessions. Thus it is better for your portfolio, and your mood, not to look at the markets during the day.
5. Learn to swim with the tide...
Markets move in cycles. In a bull market, investors are confident and share prices rise. In a bear market, share prices fall, and nervous investors sell. It’s important to always be aware what stage of the cycle the market is at.
Here’s a tip for a bull market. Often, it’s the ‘laziest’ investors who benefit most. Even when shares are on the up, there will be temporary dips. Those who chop and change are likely to come off worse. The biggest challenge for investors in these periods is shutting out the noise of the 24-hour news cycle and being prepared to ride out minor setbacks.
6. ...Know when to cut your losses
When everyone thinks alike, the crowd often gets things wrong. There are countless examples over the years of investors creating ‘bubbles’ that end up bursting: tulips in the 17th century, the early dotcom businesses at the start of the 21st century and, at times during recent years, crypto assets.
Always remember, perfect foresight is impossible. While you can weather short-term hiccups, the more-experienced investor knows when to cut their losses, the most important aspect of investing. Losing 50% of your portfolio means you need to make a gain of 100% (in other words, double your money) just to get back to where you started.
7. Think twice before staying in cash in the winter
The majority of equity market returns are achieved in the winter months. On average, the summer months show a positive return, but it is usually much lower than the winter months. In bear markets the summer months show even stronger declines.
8. Doing it yourself can cost a fortune
This brings us onto the last essential piece of investment advice. Don’t do it alone.
A study of returns over 20 years showed that an ‘average investor’ turned US$1 million into US$1.7 million. On the face of it, that’s a respectable return, beating cash and ahead of inflation. But, in that same time, the market rose sixfold, while a managed portfolio, made up of stocks and bonds to balance out risk, rose to US$4 million. Doing things yourself would have missed out on a significant amount.
But it’s not just about the money. Investing is complex, full of twists and turns. Carefully watching the market is a stressful business. And often a pointless one (as we mentioned: if you look at the US market, most of the gains in the last 30 years were made overnight, outside trading hours: think of all that wasted effort on worrying!). The benefit of a balanced portfolio is that the additional stress has been delegated to an expert. These eight simple rules are only the beginning, but they can hopefully form the basis of a long and fruitful investment journey.