A key to successful investing is having time-tested investment principles that are consistently followed over time. Financial success and independence look different for everyone. However, the proven investment principles and wealth building strategies may be the same for you as they are for Bill Gates or Warren Buffet.
A principle is a:
- Fundamental truth or proposition that serves as the basis for a belief or behavior system and / or for a chain of reasoning.
- Rule or belief that governs one’s own personal conduct.
Investing principles seem to be cited everywhere. They are usually found at the beginning (or near the beginning) of most marketing brochures and / or websites. This is because they are extremely extremely important. I submit that one of the most important questions you can ask a financial advisor you are considering working with is this: “What are your investment principles and please explain to me?”
One of my most memorable ‘ah-ha’ moments on this topic came when I was in San Francisco in the mid-1990s. I participated in an important meeting being organized by Charles Schwab & Co. Let me share the moment. Charles Schwab had a few hundred branches across the country. This was a three-day annual meeting for branch managers in San Francisco. We had only just started providing investment advice to clients a few years earlier. One of the questions we were struggling to answer in this new world of providing this advice was, “What can and should we not say to clients to help them with their investment decisions?”
Sound like an easy question to answer? Trust me, it wasn’t. We needed to be able to provide a guide that was broad enough to help clients and narrow enough to ensure that we could train all the advisors so that they could provide good practical advice to clients across the country. Therefore, the sessions that addressed this topic were very lively. Charles Schwab was actively running the company at the time and seemed to realize this, because during one of the question and answer sessions he shared a list of seven. “General rules for investingThey were basically investment principles. The seven general rules eventually became the Ten Investment Principles that Charles Schwab & Co. uses today. Some of these principles, along with some that I added myself, have guided my investment decisions. investment since then.
I’ve listed mine below (with some other investing principles) to give you some specific examples. I have come across hundreds of such principles in my career, and these are some of the best I have come across. However, I want to make it clear that you should have your own four or five principles to guide your investment decisions. And you must believe in them to the core!
There is no secret book or all-knowing place to find investing principles. You will also find that these principles should be used in combination. Success will not come from wearing just one.
Again, four or five personal investment principles used in combination and consistently over time will greatly improve your chances of financial success. They will become your ‘beacon in the storm’ and believe me, there Will Be storms. Investing principles are the reason some people seem to go from one market crisis to the next with minimal stress.
Here are some examples of investment principles.
Invest for the long term – To quote Warren Buffet, “Our favorite waiting period is forever.” Although this is not always advisable or practical, it is an excellent long-term view of the investment. Looking at investments from a long-term perspective is an investment principle that we live to adhere to, although we will review and monitor all investments for changes in their fundamentals to ensure they are investments that we must continue to hold.
Don’t take time to market; always be invested – It is very difficult to synchronize the market. When it comes to timing the market, the challenge is being right twice – knowing when to exit and then knowing when to re-enter.
Know your tolerance for risk – This is the basis for having a long-term vision. If a client knows their investment tolerance, they are not making emotionally charged decisions to enter or exit the market at the wrong times due to volatility.
Be an investor, not a saver – An investor takes into account the risk / reward and actual rates of return after inflation, while a saver only focuses on the safety of the principal.
Concentration creates wealth, diversification preserves wealth – It is okay to have concentrated positions at different times in a person’s life. This is how wealth is created in many cases, although it must be done at a time when a customer has income, other assets, and time. It must also be done consciously.
Some debts are good, but most debts are bad – Good debt used correctly involves buying something that is likely to hold up or increase in value, such as a home mortgage. Bad debt is when a person uses it on something that can be consumed.
Investing is not a game – Many people think of investing the same way they think of sports or gambling: as a game. Watch CNBC for a day and you will see what we mean; it’s not much different than watching ESPN on any Sunday during football season. But investing is not a game and should not be seen as such.
Patience is the key – Allow time for your investments to grow. Benjamin Franklin was quoted as saying, “Compound interest is the eighth wonder of the world,” while Albert Einstein said, “Compound interest is the world’s greatest discovery.” In any case, time and patience are key to building wealth and taking advantage of these investment principles.
Risk is part of the investment – The key is that when you take risks, you know that you get paid for it. For example, small-cap value stocks are riskier than large-cap growth stocks. Because of this, you should expect better performance over time from small-cap value stocks; you will probably be rewarded for taking the risk.