I recently read an article written by David Booth who is the Executive Chairman and founder of Dimensional Fund Advisors. Dimensional is a US fund manager with $637 billion assets under management. In his article he shared five priceless tips on how to be a successful investor. As too many people keep falling into the same traps, I think they are a great reminder as to what every investor should know so I wanted to share them with you as well.
Gambling Is Not Investing, and Investing Is Not gambling
Gambling is a short term bet. If you treat the market like a casino, and you’re picking stocks or timing the market, you need to be right twice by buying low and selling high. Investing, on the other hand, is long term. While all investments have risk, there are things that can be done as a long term investor to manage those risks and be prepared. For example, buying a little bit of thousands of companies and holding them for a long time. The only bet is on human ingenuity to find productive solutions to the world’s problems.
Embrace Uncertainty
Over the past 100 years, the US stock market has returned a little over 10% on average per year but hardly ever close to 10% on any given year. Stock market behaviour is uncertain. The way to deal with uncertainty is to prepare for it. Make the best informed choices, monitor performance and make adjustments as necessary. Course corrections may need to be taken to get back on track in case things don’t go as expected. Remember, you can’t control the markets.
Effective Implementation
Choose fund managers who can consistently execute their strategies better than others, as well as doing it at a lower cost. Gaining a few extra basis points each year through effective implementation can make a big difference to your investment value over a long period of time.
Tune Out the Noise
If you don’t understand something, don’t invest in it. A lot of investment fads will come and go. Media pundits handing out stock tips? Friends or family letting you in on their next big investment. Focus on your goals and keep things simple (steady and boring wins the race). There is no compelling evidence that professional stock pickers can consistently beat the markets. Even if a manager outperforms, it’s difficult to know whether this was skill or luck. You can still do well without trying to find out what markets have missed. Everybody can have access to the expected returns that a diversified, low-cost portfolio can generate.
Stay the Course
It can be difficult to stay the course during periods of extreme market movements. At the end of March 2020, the S&P 500 (the largest 500 companies traded on the US stock market) was down nearly 20% for the calendar year to date. Record amounts of money exited equity funds and went into cash. Those investors who stayed out of the equity market missed out on the subsequent 56% gain in the S&P 500 over the next 12 months.
Selecting the right blend of risk (equities) and defensive assets, by taking into account the level of risk you feel comfortable in taking, the level of risk you may need to take and the level of risk your plan is able to withstand without it being derailed in the event of a severe market fall will help you to stay the course. Defensive assets are your insurance policy against equity market falls. It’s a bit like car insurance. When all is well it is a bit of drain on your finances but in the event of a crash you are likely to be glad you had some!
Learning to embrace uncertainty allows you to focus on controlling what you can control. Discipline applied over a lifetime can have a powerful impact and is likely to close the gap between where you are now and where you want to get to.