Thursday, July 5, 2012

The 4 Things Every Investor Should Know

We live in challenging times.  It has been a long time since rising markets have been so generous as to forgive the sins of a poorly constructed investment portfolio.  And it is in uncertain times such as this that it is worth remembering what we can rely on.  
With this in mind, we thought it timely to list the definitive top four investment principles that every investor should know:
  1. How you allocate your investment capital across the different asset classes is by far the biggest determinant of portfolio performance.  Academic research shows that more than 90% of the long-term performance of an investment fund, is determined by its asset allocation.   Market-timing and individual stock selection are shown to have been unable to produce enough value to overcome the associated operating expenses and transaction costs of active management. Stock-pickers take note!
  2. Stop thinking that you can second guess the market.  All the news, good and bad, is already reflected in the market price. Also, the probability of you being consistently smarter than the collective knowledge of all other market participants …. well, let’s just say that it is improbable.  Empirical research has found that even professional fund managers who do this for their day job have real trouble beating the market consistently.  And most don’t.
  3. The best protection against volatility is diversification, both across the asset classes and within each asset class. Yes we have all heard this before – that is because it is an investment truism, so don’t break this golden rule.
  4. Heads and tails … risk and return, two sides of the same coin.  When risk is high, investors gravitate toward safe assets and away from riskier assets.  The prices of riskier assets adjust downwards thereby offering a higher expected return for those assets.  This reminds us of a great quote from Warren Buffett  “Those who invest only when commentators are upbeat end up paying a heavy price for meaningless reassurance”.

Sorry if we are sounding like a broken record here but these are the fundamentals of a good investment strategy ..... applying them provides the highest probability of a successful investment experience.

financial advice

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