Invest for the long term and look through the short-term – investing is, as they say, a zero sum game – in each transaction there’s a winner and a loser. You’re highly unlikely to get it perfect every time but you can minimise potential investment losses by investing for the long term. Investing well is the main game, minimising tax is appealing but secondary. Trading fast and often is generally a ‘mug’s game’; so avoid being unduly influenced by short-view media stories, following fads or ‘hot stocks’. A better approach is to follow a long-term plan to suit your wealth, age and tolerance of price volatility – then stick to it. With a well-considered long-term strategy, you can sleep easy in the short-term.
Diversify – We’ve all heard it before – “don’t put all your eggs in one basket” but plenty do. Success in investing comes from managing risk and return. Diversifying across different asset classes can reduce portfolio risk. Then diversifying further across several assets within an asset class also reduces the risk from an individual asset – i.e. relying on just one or a few.
Turn down the noise – Once you’ve worked out a strategy that suits you, it’s important to turn down the investment market ‘noise’. Over recent years, there’s been a huge media saturation of market information. The economy tends to operate in longer-term cycles and for the stock market, companies typically report only twice a year. So all the daily ‘noise’ only confuses and can produce unfortunate investment decisions.
Focus on investments that offer sustainable cash flow – This is very important. There’s been lots of investments over the years that have been sold on the promise of high returns or low risk but were underpinned by hope based on hot air (e.g. many dot com stocks in the 1990s, resources stocks periodically). But the key is that if it looks suspicious, is hard to understand or it’s based on obscure valuation measures then it’s probably best to stay away. By contrast, assets more likely to deliver the goods, are those that generate sustainable cash flows (profits, rents, interest payments) without relying on excessive debt or financial engineering. If it’s hard to understand, you probably shouldn’t do it.
Finally, seek professional and independent financial advice – There are many traps for investors, so a good approach is to seek the advice of financial adviser. This is much the same as the way you might use a specialist to look after other aspects of your life like fixing your teeth, your medical needs or repairing plumbing at home. With good support you’ll be in a position to delegate and monitor its progress while spending your time doing other things.
Simon Wotherspoon CFP®
Astute Investing