Here are the 10 basics that every investor should know to save a lot of time, money and trouble:
1. A share of stock represents partial ownership in a business and gives the shareholder the right to share in the dividends and capital appreciation of the company.
2. A diversified portfolio of equities is less risky than a concentrated one.
3. Each year, 3 out of 4 equity fund managers don’t outperform their unmanaged benchmark, like the S&P 500. Over a decade or more, 95% of them don’t. Therefore, your funds should be primarily index funds.
4. History shows that equities are the highest-returning investments. There are various asset classes: growth and value, foreign and domestic, small cap and large cap, and so on. To lower your risk and increase your returns, you should invest across all of them.
5. Stocks are volatile and subject to sudden and substantial declines in value. Therefore, mix them with other assets like precious metals, real estates, commodities, bonds, crypto currencies, just to name some. Spreading your investments among different types of investments is called asset allocation. It is responsible for 90% of your long-term return.
6. The future value of your portfolio will be due to 6 factors and each of them is under your control:
a) The amount of money you invest.
b) The length of time it compounds.
c) Your asset allocation.
d) Your security selection.
e) Your investment costs.
f) Your annual tax liability.
To maximize your returns, you want to save as much as you can, let it compound as long as you can, asset allocate properly, diversify broadly, minimize your investment costs and tax-manage your portfolio.
7. Use a proven system and stick to it.
8. Most investors are their own worst enemies. So, do not try to time the market and/or chase performance and/or sell in panic. You will lower your returns.
9. Maintain a positive long-term outlook and never switch it off.
10. Broaden your perspective with objective data, that reveal many positive trends for the economy. The mainstream media does not report objectively. Therefore, follow the trend lines, not the headlines.
Follow the basics and you will reach financial independence a lot sooner and with fewer hard lessons learned.
Sven Franssen