Last year we wrote an article about the Eight Timeless Principles of Investing. Due to the current state of the market and economy, it is an appropriate message to revisit, to reflect on and to offer a refresher on these principles. Prudent investing is a life-long journey–it’s important to take a step back, assess what is going on, and remember how prudent principles can be a guide no matter the state of the market or economy.
Making smart investment decisions is hard. The market is complicated and volatile, and it’s easy to get swept up in the hoopla of financial headlines, talking (or barking) financial media figures (Jim Cramer comes to mind) and just the general bad news that permeates all investment news cycles.
However, if you follow these Eight Timeless Principles of Investing, you’ll be able to make sounder financial decisions that will last a lifetime.
Focus On What You Can Control
While you can’t control market movements, business decisions, economic events, politics and interest rates, many investors react emotionally to these things. You must learn how to control your emotions and reactions so that when the inevitable happens (and it will happen), your portfolio doesn’t make you go into cardiac arrest.
If you focus on what you can control, and let the rest of it go, you will have an easier time staying in the game.
You can control how much you allocate to stocks and bonds, the industries, and sectors that you invest in, and the companies you choose to buy. Most importantly, you can determine when to buy, hold or sell those investments.
Here are the key reasons to focus on what you can control:
- You’ll gain confidence in your investing abilities.
- You’ll save money on transaction costs (you won’t be constantly buying and selling instead you will have a determined strategy guided by a financial plan).
Put Time On Your Side
In The Millionaire Next Door, Thomas Stanley and William Danko write that “Long-term investing will generally outpace inflation.” They cite a study that showed that over a 20-year period, the S&P 500 Index returned 9.9% per year, while gold was down 0.4% per year and bonds were up 5%.
This doesn’t mean you should invest for the long term only!
It’s important to keep in mind that investing for the short term can still be profitable as well if you’re disciplined about it (more on this later). Overall, if you want your money to grow faster than inflation over time and have an understanding of the risk—particularly market risk—investing for the long haul is usually your best bet.
Tune Out The Noise
It is important to tune out the noise because it drives fear, uncertainty, and doubt.
News headlines will create anxiety resulting in a desire to chase stock market returns. Information overload will result in faulty investment decisions. Tune out the noise so you can live your life and focus on the future.
Many of us have heard the phrase “Don’t believe everything you hear” or “If it sounds too good to be true, it probably is.” Those are some of life’s great truths, especially when it comes to investing. The investment news media is sometimes described as the “financial entertainment complex,” and there is certainly a lot of entertainment value in it! There are plenty of investment and financial personalities who love to make bold statements about what the market will or will not do next.
Here are some timeless principles you should keep in mind as you invest:
- The market is not the economy. The stock market rarely reacts rationally to economic events, even major ones.
- Fundamentals drive long-term performance. Don’t invest based on fear or greed—invest based on fundamentals and long-term results.
- Based on history, markets always go up eventually. There are no permanent bear markets.
- There is no such thing as market timing. You can never be certain about where the market is headed in the short term, even over a few years. Rest assured, no advisor or media “guru” can either.
Don’t Try To Time The Market
- No one can predict the future. There are no guarantees when it comes to investing. Even mutual fund managers, stock pickers and Wall Street analysts cannot accurately predict which companies will outperform over time.
- Today’s winners may be tomorrow’s losers. You don’t want to make an investment decision based on what’s happening now. If you’re buying a stock because everyone else is, that means everyone else thinks it’s going up—but there are always new people coming in as old ones leave. The more popular something gets, the harder it is to maintain a good price/performance ratio unless there is a news event that affects all stocks at once (which has happened).
- Buy low and sell high. This isn’t just some catchy phrase; it really does mean something important if you’re trying not only to keep your money safe but grow your assets as well. A prudent investment strategy coupled with a financial plan can help you protect and grow your investments in all market environments.
One of the most popular investment strategies is called dollar-cost averaging (DCA). Dollar-cost averaging involves buying a fixed amount of an asset over time, regardless of its price. This strategy allows you to buy more shares when the price is low and fewer shares when it’s high. One of the benefits of dollar-cost averaging is that it can help you avoid trying to predict the stock market’s future direction.
Understand All Forms Of Risk
Understanding risk is not just about market risk, but all the different risks that are present in investing such as market risk, political risk, inflation risk, etc.
The risks of long-life span and inflation are often overlooked by investors who believe market returns will lead to growth over time, but there are other risks to consider as well. For example, healthcare costs continue to rise faster than inflation or wage increases, so those costs could eat into your retirement savings if you don’t plan. Not to mention the high prices on long-term care that most families will face in retirement.
There are means to measure risks when it comes to investing. One way is to use the standard deviation, which measures how far your investments move from their average return. A lower standard deviation means less volatility. Another way is to look at historical returns of similar assets and compare them with your portfolio’s current holdings.
Avoid The Emotional Roller Coaster
If you’re an investor, you should try to avoid the emotional roller coaster.
- Avoid becoming the DALBAR Investor. The DALBAR investor is related to the QAIB Study from The DALBAR Research Institute. As DALBAR points out: “[s]ince 1994, DALBAR’s Quantitative Analysis of Investor Behavior (QAIB) has measured the effects of investor decisions to buy, sell and switch into and out of mutual funds over short and long-term timeframes. These effects are measured from the perspective of the investor and do not represent the performance of the investments themselves. The results consistently show that the average investor earns less – in many cases, much less – than mutual fund performance reports would suggest.”
- Poor investment decisions are the result of unmanaged emotions. Emotions are powerful forces that affect every aspect of our lives and often lead us to make poor financial decisions. These can include buying high and selling low, reacting emotionally rather than logically, and allowing fear or greed to drive your decisions instead of common sense and logic. Another common example is letting your tax situation solely drive investment decisions. As the previous point illustrates when we are driven purely by emotions, the typical outcome is frustration and low investment returns.
Kick Up The Savings
This might sound obvious, but it’s important not just in terms of what percentage of your income you save each month, but also how much. A solid, prudent financial plan can help you to determine just how much you need to be saving to meet your goals.
There are two types of savings: short-term and long-term. Short-term savings refers to money that you know will be spent within the year or two, such as college tuition or a new car purchase. Longer-term savings includes retirement accounts like 401(k) plans or IRAs (individual retirement accounts), which may be decades away from being tapped into.
A financial plan can help you calculate how much money you have saved for each type of account—short term and long term.
Delegate The Details To A Financial Planner
A CERTIFIED FINANCIAL PLANNER™ is a professional who helps you make financial decisions. They can help with investment planning, retirement planning, estate planning, college planning and more. A CFP® is a fiduciary and has a duty to act in your best interest. Lucky for our clients, Team BCA has numerous CFP® professionals to help you with anything that comes up in life.
By following the Eight Timeless Principles of Investing, you’ll be able to make sounder financial decisions that will last a lifetime. Our mission is to help you grow, protect, and pass on your wealth. We want you to be able to enjoy the benefits of your hard work for decades to come.
Have a great weekend!
Source: Ballentine Capital Advisors
Golf Tip of the Week
Hitting Pure Short Irons, Explained
Admit it. You’ve spent hours at the practice range, hitting ball after ball with your pitching wedge or 9-iron, looking for that pure contact tour players seem to achieve effortlessly. You’ve sped up your swing, slowed it down, and done all kinds of things with your hands, all in an effort to make the ball fly with predictable trajectory and the backspin to stop your shots by the hole.
But the secret isn’t in your hands, or in the dirt. It’s in your backswing.
“Hitting good short iron shots has nothing to do with speed. It’s about getting the club to come into the ground and the ball on the right angle and path,” says Golf Digest Top 50 Teacher Michael Jacobs. “That means you need more ‘vertical’ in your swing.”
We can learn from two of the best ball-strikers on tour, who led the PGA Tour in strokes gained/approach in the 2019-’20 season—Justin Thomas and Collin Morikawa. Though tour players are very good at doing things average players can’t do, we can study how they hit short irons and try to copy their positions.
The first key to finding the center of the clubface with your short irons, Jacobs says, is to forget the idea that you should use the same swing for these clubs as you would for a hybrid or a driver.
“For most players, it’s way lower, under where the logo would be on the shirt. The arm that low means the shaft is also low, which might work for a more sweeping swing but won’t help you hit short irons well.”
To work on it, make some less-than-full swings with a short iron where you do the opposite of what you might have heard when it comes to using a headcover under your trail arm as a training aid. Instead of holding it under there for the swing, start with it tucked there and make sure you drop it early in the backswing.
“When you can get that left arm in line with your collarbone—like Collin Morikawa also does, above—the club stays more in front of your body early, instead of getting behind you. You won’t be swinging any faster, but you’ll make much better contact and produce better ball speed and a more predictable launch.”
Tip adapted from golfdigest.comi
Recipe of the Week
- 1/2 cup caster sugar
- 2 tsp water
- 1/3 cup thickened cream
- 1/2 tsp sea salt
- 1/2 dark chocolate melts
- 1 1/2 cups marshmallows
- Cookies, to serve
- Cook caster sugar and water in a saucepan over low heat, stirring until sugar dissolves. Bring to boil. Reduce heat to low. Simmer, without stirring, for 6-8 minutes or until golden. Remove from heat.
- Whisk in cream and sea salt (mixture may spit). Pour into an 18cm oven-proof frying pan. Place in fridge until firm.
- Preheat grill/oven to a medium-high. Arrange dark chocolate melts over caramel. Top with marshmallows. Cook until toasted. Serve with cookies of choice.
Recipe adapted from taste.com.auii
Health Tip of the Week
Aging and Hearing
About 30 percent of adults over age 65 have some age-related hearing loss, commonly caused by either a change in the nerves or structure of the ear, or an outside factor like long-term exposure to loud noises, medical conditions, or drug side effects.
Hearing loss usually progresses gradually and might not be noticeable at first. Common signs are difficulty hearing high-pitched sounds or understanding conversations over background noise, finding some sounds to be too loud, or hearing ringing in one get one or both ears (tinnitus).
For a timely diagnosis and treatment, report any hearing loss symptoms as soon as possible. If needed, hearing aids can be life-changing, and there are also technologies available to help people with hearing impairments translate speech to text on televisions, computers, phones and smart devices.
Tip adapted from hopkinsmedicine.orgiii
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