Successful investment depends heavily on discipline, and this is exactly what is often lacking at private investors. The following list of Dos and Don’ts should bet he basis of your investment discipline:
Dos
Save a fixed amount of your income on a a regular basis. The earlier you start investing, the higher your retirement assets will be. Making up fort he lost time will not be possible.
Diversify your investments massively. Diversification is your single most efficient tool to limit the risk of our investments. Along the way, you will find investment opportunities that seem very attractive and will be tempted to invest heavily in them. Document your personal diversification rules and validate every investment against these rules.
Own the house you live in – if it is a sound investment (outlook and price) and if you can afford it. Living in your own property is heavily influenced by the culture of your country. In some countries, it is considered a must and massive mortgages seem acceptable and any market price seems reasonable. Free yourself from your own cultural influences! Compare the cost of ownership with a comparable rent. Analyse the market developments and invest only in real estate that qualifies as a conservative investment. Your own house should bet he only investment that exceeds your own diversification rules.
Have at least one emergency fund. At no point in time, you should be forced to sell an investment you made for the long term. You should have sufficient liquidity to cover unforeseen expenses and preferably have cost of living for six to nine months invested in assets with low risk and volatility.
Sell the investments that did not turn out as expected. Whenever you engage an investment, you should document why you believe it will be successful, thus writing down the story. It might be based on long-term developments of society like globalization or demographic changes. With any upcoming news along the way, this story must be validated. Only if you original story turned out to be unrealistic, sell. This should prevent you from falling to negative sentiment of investment analysts.
Review all your investment exactly once a year. No more and no less! Studies have shown that this frequency delivers the best results.
Don’t
Try to avoid risk in your investments altogether. E.g. investing in CDs or similar low-interest fixed-income that does not beat inflation. Taking risk is mandatory, if you don’t play, you have lost already.
Underestimate FX risk. Many investors who believe they are strongly diversified, actually are not. By default, most private investors invest in their home coutry. However, this exposes the portfolio to a very high FX and country risk. The last years have shown that FX volatility is often higher than the volatility of most individual (blue chip) stocks. To properly diversify, a global investment strategy is required. For this, invest in different countries and currencies, covering industrialized and emerging countries.
Time the market. Investing for retirement is about long-term investing. Knowing when to buy a stock at ist lowest price is about impossible and trying is not a proper basis for your investment strategy. On the other hand, the world we live is is undergoing massive and predictable changes that require decades. These changes can be used for long-term investments and promise a high return.
Dos and Don’ts for investing
May 8, 2012