You should have three primary goals as an investor:
1. Understand the true state of the world.
2. Recognize what you can and cannot control.
3. Capitalize on profitable trends.
1. Understand the true state of the world?
Most investors fall prey to the relentless negativity of the mainstream media. Most people believe the world is far less free, less peaceful, less safe, less equal and less affluent than it really is. If you want to be a successful investor, follow the trend lines and not the headlines.
Adopt an accurate, fact-based view of the world.
2. Recognize what you can control
There are a lot of things that matter to investors. Just a few of them include: Economic growth, inflation, interest rates, commodity prices, technological innovation, corporate earnings, geopolitical events, elections, Fed policy and new legislation among many other things.
All of these factors will affect your portfolio in one way or another but precisely none of them you can control or influence. Don’t waste your precious time trying to predict them. Don’t guess. The intelligent investor is limiting the guesswork.
Instead you should focus on the 7 factors that determine the future value of your portfolio:
1. The investment amount
2. Years of compounding
3. Asset allocation
4. Investment selection
5. Sell discipline
6. Cost
7. Taxes on interest, dividends and capital gains.
You can control and influence all of them.
Therefore, do the following:
1. You should invest as much as you reasonably can, as soon as you can.
2. You should leave it alone to compound as long as you can.
3. You should have an asset allocation that reflects your age, experience, risk tolerance and time horizon.
4. You should implement your asset allocation with a selection of securities of individual stocks, ETFs and no-load mutual funds – that are low-cost and tax-efficient.
5. You should use a sell discipline such as annual rebalancing and/or trailing stops to protect your profits and limit your risk.
6. Choose low cost online brokers, low cost ETF’s and no-load mutual funds to keep cost low.
7. You should tax-manage your portfolio.
If you follow these 7 basic steps, you will do better than 95% of investors. You almost certainly reach your investment goals with less stress and anxiety. Focus on what is important and within your decision-making capabilities.
Sven Franssen