Our investing philosophy with nine fundamental principles
There are basic fundamental investment principles that apply to each and every one of us. Whether we are seasoned portfolio managers or inexperienced investors, it never hurts to take the time to review these important principles regularly and improve the basis for our investment decisions.
It is important to know what type of investor you are and to adhere to the principles of your investment strategies. What type of investor are you? Value, growth or momentum? Here at econvestor, we strongly believe that investment decisions should be based on earnings and valuation.
Regardless of the investment strategy you choose, you should stick to a consistent approach. In other words, a value investor shouldn’t be involved in momentum investing.
When you buy an asset for less than its true value, you have a margin of safety. The price counts! The best plan to reduce risk is to buy assets at a price that is below real or intrinsic value. A low price means more upside when conditions are favourable.
A low price offers a margin of safety when the circumstances are not ideal. Always plan under non-ideal conditions to protect when something goes wrong.
Your asset allocation is the most important factor in your investment returns. This is where a lot of investors fail because they don’t consider enough their asset allocation strategy.Â
It is important to overweight and underweight bargain-priced asset classes or avoid costly asset classes. Keeping your investments in cash when you get zero or negative return is certainly not a wise strategy.
Diversifying investments in small amounts offers great benefits. In other words, five investments are much better than two, ten investments are better than five. However, the marginal benefits of additional investments decrease as the number increases, until the costs exceed the benefits.
Most studies show that optimization takes place between 15 and 30 individual investments.
Short term investing is one of the major drawbacks of investing strategies today. Successful investors find that when they buy an investment at a cheap price, it can take the market a while to realize its true worth.
It is one of the most important investment principles because short-term trading usually leads to poor performance over the long term. This is common because many investors allow fear and greed to affect them in making bad investment decisions.
Most investors don’t see the difference high spending makes on their portfolio. Assume flat investment of $100,000 over 30 years. Also assume a 5% real return minus 0.4% expense ratio versus a 1.4% expense ratio for investors.
Over a 30-year period, a 1% increase in spending will cost your portfolio more than its original capital! The difference in the above example will be more than $146,000 in final proceeds
Compound or exponential growth (they mean the same thing) is a strong financial concept. Â Understand how it works for you and why increasing dividends will multiply the value of compounding.
It is equally important to understand the ravages of reverse compounding. A 10% loss only requires an 11% gain to break even; however, a 50% loss requires a 100% gain to break even.
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You can control the volatility of the portfolio, but you cannot control the inevitable volatility of the investment markets.
Therefore, you must be willing to utilize investment opportunities when they appear because of volatility. You also need to be aware of overvalued assets and be ready to cash in and out depending on market conditions.
Make your money work for you and make more money for you! Self-investing in the stock market is an attractive alternative. Technology and Internet have diminished the transaction costs and provide information at a very low cost.
It has never been a better time for investors to invest in the stock market.
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