7 investing rules it pays to remember

Investing rules can be easy to come by and hard to implement. As you can imagine, we spend a fair amount of our time, both at work and at home, reading financial news and periodicals. Several years ago, we ran across an article in the Wall Street Journal called “16 Rules for Investors to Live By.” While all 16 mentioned are definitely worth paying attention to, we are listing what we consider to be the top seven here.  They bear worth repeating.

1. “Short-term thinking is at the root of most investing problems.” – As the WSJ article mentions, “markets reward patience.” It’s imperative to ignore the noise, to focus not on the trees, but on the forest. Long term is the only term when investing. Market timing is more often than not fruitless. The reason is because of rule #2.

2. “’I don’t know’ are three of the most underused words in investing.” – We don’t know what the market will do tomorrow, or the next day, or in the next few months. But we are confident that the market will be higher 5-10 years from now. The road the market takes to get there will be lumpier and bumpier than many investors want to recognize. You’ll hear us talk about “strong hands” and “weak hands” in the market. Weak hands represent investors who aren’t in it for the long haul, so they get washed out whenever the pain gets too much to bear. Strong hands represent the buyers of the assets sold by the weak hands. This brings us to rule #3.

3. “Investing is overwhelmingly a game of psychology.” – Having the intestinal fortitude to stick with an investment plan is much easier when you acknowledge rule #1 and can appreciate rule #2. We’ve written about behavioral finance in this blog before, and will again. As humans, we are guilty of the following biases: we think the future will resemble the recent past, we tend to read articles that support what we already believe rather than those that challenge our thinking, and we suffer from hindsight bias – the mistaken belief after the fact that something could have been predicted. These are just a few of our inherent biases.

4. “There are no points awarded for difficulty.” – As the WSJ article so accurately states: “For many people, a diversified buy-and-hold strategy is the most reasonable way to invest. Some find it boring, but the purpose of investing isn’t to reduce boredom; it is to increase wealth.” Some strategies clearly try too hard, effectively prevent performance from happening, and/or are set up to generate fees and commissions for the selling advisor. Pick an asset allocation, manage to it, remain invested, and over time you’ll be glad you did.

5. “Read past stock market predictions, and you will take current predictions less seriously.” – I have a folder full of old stock market-related articles. Recently, I was going through this file when I came across an article from the March 17, 1999 issue of the Wall Street Journal. It was entitled “Stock Prices Are Still Far Too Low.” In it, authors James K. Glassman and Kevin A. Hassett argued the Dow Jones Industrial Average should be trading at 36,000, “tomorrow, not 10 or 20 years from now.” Twenty years later, the Dow is getting closer, currently trading at 27,287.

6. “A couple of times per decade, investors forget that recessions happen a couple of times per decade.” – It never fails (and confirms rule #3 above) that investors begin to see market gains as a given after several years of a bull market. Then when the stock market has the gall to go down, some investors react as if their birthright has been stolen. Stocks aren’t FDIC insured. They will lose money from time to time. That doesn’t make it any easier to stomach when it happens, but bear markets typically follow bull markets and bull markets eventually follow bear markets.

7. “Don’t check your brokerage account once a day and your blood pressure only once a year.” – This is great advice. Focus on the things that you can control. The stock market’s return isn’t one of those things. Either hire a fee-only investment advisor to watch your assets or if you’re a do-it-yourselfer, pay a little less attention to the short-term movements and focus on the big picture.

These seven rules can essentially be reduced to the following: Keep it simple. Have a long-term plan and stick to it. Ignore the noise and stay focused. Control the controllable.

Source:

16 Rules for Investors to Live By” by Morgan Housel, The Wall Street Journal Online, December 8, 2014

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