Rules To Live By

Below are some of the investing rules every investor should live by:

1. Establish Clear And Defined Goals First

The Chesire Cat in Lewis Caroll's well-known fable "Alice In Wonderland' told Alice that if she doesn't know where she wants to go then it "doesn't really matter". This quote can be no further from the truth when it comes to the realm of investing! Investors without clear and defined goals often invest into the latest investment fads and chase short term gains which may not be sustainable, or end up falling for investment schemes that may not be in their best interests. Given that, these investors often do not end up meeting their long-term investment needs and objectives, which would have been better met if they figured out their long-term investment goals and designed an investment portfolio that will be able to satisfy those needs. That said, it remains important for one to always know what he wants and needs to achieve first before deciding on his investment moves!

2. Conduct Due Diligence Beforehand

An important aspect of taking charge of one’s investments involves conducting the necessary due diligence before putting his money in any one investment. Having conducted due diligence, the risk that an investor invests in a problematic investment (e.g. a stock of a company with poor corporate governance, a bond of a company with recent difficulties meeting debt obligations) is greatly reduced. Also, the investor would be more aware of the risks and downside traits associated with the investment which would reduce the frequency by which the investor is taken by surprise throughout his holding period, should he decide to go ahead with the investment. The act of conducting due diligence before investing in any one asset would significantly increase one’s probability of making more informed investing decisions.

3. Diversify, Reduce Your Portfolio’s Risk!

Diversification is about ‘putting one’s eggs in different baskets’, or reducing concentration risks. A well-diversified portfolio would be one that is invested across different asset classes, economies and markets, and sectors such that investments in the portfolio do not have a high correlation. While it is a common investor mistake to invest only in a particular economy or sector that he or she is highly positive on, this exposes the investor’s portfolio to very high concentration risk, and should the investment fail to deliver, his investment portfolio fails to deliver by the same magnitude as well. Thus, it would be advisable that he still allocates a portion of his portfolio to other investments to reduce his portfolio’s concentration risk.

4. Rebalance Your Portfolio

As previously mentioned in the Importance Of Rebalancing, markets do not move in tandem or in similar fashion and no single market will be the best performing market forever, nor will any single market be the bottom performing market for eternity. Thus, rebalancing, which involves the realigning of weights of a portfolio’s constituent assets, remains an ever-essential aspect of portfolio management so that the holdings of an investor would be kept in line with his investment objectives.

5. Focus On The Long Term

Cliché as it may sound, patience is truly a virtue when it comes to the realm of investing. It is easy for one to be tempted to reconstruct his portfolio or modify his investment strategy based on short-term observations, however this usually leads to high transaction costs which ultimately reduces overall portfolio returns over time. Frequently altering one’s portfolio in accordance to investment fads is not only costly, but also time consuming and often results in one deviating from his long term investment objectives. Do not be too quick to react upon every event in the financial markets. It is advisable that investors take the time to assess if the said event would have an impact on the long term performance and/or risks of your current holdings before making any investing decisions.

6. Do Not Attempt To Be A Timing Expert

History has shown that, given the difficulty of timing markets with precision, even by investment professionals or experienced traders, timing markets is definitely not an advisable strategy to capture returns. Unfortunately, investors usually have the tendency to overestimate their ‘timing’ abilities and usually end up joining the bandwagon instead, hopping in only after prices have already significantly risen or hopping out only after prices have significantly fallen. It is thus important that we constantly remind ourselves, that no matter how experienced or knowledgeable we think we are, it is advisable not to attempt to be a timing expert!

7. Don’t Let Your Emotions Dictate Investing Decisions!

Emotions have long been a culprit behind the overreaction of financial markets to any one market event, which have often led to financial market bubbles as well as downfalls. However, when an investor allows himself to be easily swayed by general market sentiments, he may take on expensive purchases as he purchases investments when general sentiment is positive, and lead him to miss out on undervalued investments when market sentiment is negative as he had followed the crowd retreated from the investment scene. Thus, by letting his emotions rule his head, he is effectively not “buying low and selling high”, which is a primary principle for maximising investment returns. A value investor, however, knows the true value of an investment and would invest in it if it is undervalued even though the crowd is selling, and would sell an investment even though the crowd is rapidly putting their monies in the said investment. At the end of the day, fundamentals such as valuations, earnings growth and dividends, are what should drive investing decisions rather than one’s emotions!