Now is as good a time as any to make changes in your investment program. Take a close look at your investment portfolio, and you may find some improvements are overdue.
Sticking to these 10 rules will improve the chances of your investment success.
In the decade ahead, you can improve your chances of success by adhering to these 10 rules.
1. Know where you are going. You should create an investment plan and stick to it. This means setting priorities in apportioning surplus funds; that is, deciding on the balance you want in terms of liquidity, growth or income in your portfolio.
2. Know what you are doing. Make your purchase decisions based on facts, not rumours, gossip or tips. Remember, the main difference between an amateur and a professional in investing is not any special ability of professionals to predict the future; instead, the professional’s real edge is in appreciating risks. If you are a beginning investor, try to learn from others’ mistakes, rather than making them yourself.
3. Be a realist. Recognize that dividends, interest and capital gains are all legitimate forms of income, even if tax laws treat them differently; all are equally spendable and can add to your wealth. Your plan and priorities should determine your investments. Make taxes a secondary consideration.
4. Stress values over predictions. If you wonder how high a stock will go or how much XYZ Co. will earn during the next five years, you are stressing the wrong considerations. What you should ask is, does this stock represent good value, considering its current earnings, dividends, assets and past record? Buying value involves less uncertainty and less risk to your capital than buying predictions.
5. Use margin sparingly and judiciously. Margin borrowing can smooth out cash flow, so that unusual or unexpected expenses don’t interfere with a continuing investment plan. It also lets you take advantage of special opportunities when you’re short of cash, such as exercising rights or picking up bargains. Margin can also speed up the acquiring of a diversified, balanced portfolio. It’s best to use it to buy high-quality issues only, however. Buying low-quality stocks on margin is a form of double jeopardy—as is using margin after the market has had a lengthy rise.
6. Appreciate the power of compounding. If your capital is earning 10 per cent, it will double in roughly seven years; at 12 per cent, in roughly six years, and so on. (The Rule of 72 is a handy way of calculating how long it will take your money to double. Simply divide the interest rate into 72. For example, an interest rate of 10 per cent allows your money to double in roughly 7.2 years.)
7. Follow the ‘buy-and-hold’ philosophy. It takes time for even the best of stocks to double or triple in value, so be patient and give them a chance. Sell good stocks only for the soundest of reasons. Don’t let anybody tell you that you can’t go broke taking a profit. The idea is to increase your assets, not to prevent yourself from going broke. In any event, only sell a stock when it no longer fits your investment plans or objectives, or when the company’s prospects have clearly changed for the worse.
8. Aim for a portfolio that reflects your virtues and talents, without mirroring faults and prejudices. There are many ways to go wrong, and many people to help you do so—that is, people who will try to get you excited or anxious or worried to sell you something. So buy, but don’t be ‘sold’.
9. Relax and maintain your perspective. Avoid the temptation to become a tape watcher. Your portfolio is probably only a small part of your overall wealth. If you use common sense and keep your affairs as simple as possible, you can and will do well. You’ll find the best buys in ‘quiet’ places of contrary opinion. So, train yourself to buy when things look blackest and can’t get worse, and to sell or at least quit buying when things look brightest and can’t get better. The determined and disciplined plodder will always win out over the ‘get-rich quick’ types.
10. Do it now. If your investment program needs improving or upgrading, don’t hesitate. Improvements delayed mean benefits delayed. Persistent faults, left to fester, make ultimate results that much worse. Once you have your investment program well in tune, however, leave it be.
This is an edited version of an article that was originally published for subscribers in the December 4, 2020, issue of The Investment Reporter. You can profit from the award-winning advice subscribers receive regularly in The Investment Reporter.
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The Investment Reporter •2/18/21 •