Investing is how you make your money grow or appreciate for long term financial goals. It is a way of saving your money for something further ahead in the future.
Investing money well requires a logical and robust framework on which to build a lifelong investment programme. Here we take a look at the first five Foundation Stones that could provide a solid base to your investment programme.
Foundation stone 1: Have faith in capitalism and confidence in the markets
Capitalism is an adaptive, robust economic system that has delivered incredible developments to the benefit of mankind. It may not be fair, but it has helped to drag many of the World’s poorest out of abject poverty over the past century. It creates wealth.
The markets are an efficient mechanism for rewarding those who provide capital to those engaged in the pursuit of wealth creation.
Foundation stone 2: Accept that risk and return go hand in hand
One of the inescapable truths of investing is that to achieve higher returns, you have to take on more risk.
That seems logical enough, but you would be surprised just how many investors seem to think that it is possible to get high returns with low risk. The one thing we know for sure about risk is that if an investment looks too good to be true, it probably is.
Foundation stone 3: Let the markets do the heavy lifting
In investing, there are two main sources of potential returns. The first is the return that comes from the market and the second is the return generated through an investor’s skill.
There are two main ways in which an investor – using their skill – can try to deliver a better return than the market return; one is to time when to be in or out of the markets (market timing), the other is to pick great individual stocks (stock picking).
Empirical evidence suggests that trying to beat the market is a tough game, with very few long-term winners. As one cannot control the return of the market, and returns from skill are rare, the structure of your portfolio becomes key.
Foundation stone 4: Be patient – think long-term
There is no easy or quick way to investment success. In the short-term, market returns can be disappointing. The longer you can hold for, the more likely the returns you will receive will be at worst survivable, and hopefully far more palatable.
It is time that allows small returns to compound into large differences in outcome for the patient investor. If you want to be a good investor, you have to be patient.
Impatient investors tend to lose faith in their investments too quickly, with often painful consequences.
Foundation stone 5: Be disciplined – patience and discipline are close bedfellows.
Once you realise that to generate good long-term returns takes time, patience and belief in the markets, it is essential to put in place the discipline to stop yourself succumbing to impatience and ill-discipline.
Discipline comes in many forms: sticking to the principles above; constructing well-researched and tested portfolios that should weather all investment seasons relatively well; not chasing investments that have gone up dramatically, but sticking with the logical reasons for not owning them in the first place; and the discipline to not become despondent about short-term, unimportant market noise, and to focus on your long-term strategy.
We’ll be back next week with the final Five Foundation stones to Good Investing. In the meantime, if you would like any advice on your investments please get in touch.