A few posts earlier, I presented the 5 most important principles for successful investment. Here are 5 more principles to secure your portfolio.
The first 5 were:
1. save more
2. asset allocate properly
3. rebalance annually
4. avoid the noise of the economic forecasters
5. don’t time the market market
Here are the final 5 principles:
6. Cut your investment costs
You might get what you paid for but rarely when it comes to investment managers. Every year, at least 3 out of 4 active fund managers fail to outperform their unmanaged benchmarks. Over periods of a decade or more, more than 95% of them fail. So, why pay even a penny on fees to someone with less than a 5% chance to beat the average benchmark. There is a strong correlation between investment fees and returns. The goal is that you accumulate wealth and not your stockbroker or investment advisor.
7. Minimize taxes
Minimizing your annual tax liabilities is important to reaching your long-term financial goals. It is amazing how few people consider tax consequences how they invest. Like fees, reducing this “cost” has a huge impact on your performance. Minimize turnover because capital gains tax is not really a tax on capital gains but a tax on transactions. So, jump in and out less for small profits and hold your stocks long term or even forever. Or at lest do your short-term trading in a qualified retirement account. This way your gains compound tax-deferred, probably into a time when you pay lower taxes. The same for high-yield stocks, Treasury Inflation-Protected Securities (TIPS), real estate investment trusts (REITs) and taxable bonds. Otherwise, you’ll have to pay taxes on the interest and dividend payments each year. At the end of each year, offset realized capital gains with realized losses. You can buy the losing security back after 30 days, if you really want to.
In your taxable accounts, favour individual stocks, equity index funds and municipal bonds. These allow you to control or avoid paying taxes.
8. Follow strict buy and sell rules
You should have rules set in stone for every security you buy and sell. The best rules that kick in are automatic ones without any emotional impact. But not only when you buy but nearly even more important when you sell. You could use rebalancing or trailing stops. They cut out the emotions, timing or short-term noises in the market. This protects profits in good times and conserves our principal in not so good ones.
9. Have realistic expectations
A real problem is unrealistic expectations. Do not try to get rich quick. Apply proven principles that work in the long-term. Don’t gamble on short term, triple digit profits. All you need is time to let your investment compound. This is how you build real wealth.
10. Control your emotions
Investors want to buy low and sell high. But most investors only get interested to buy stocks when it is late in a bull market and valuations and complacency are high. They buy when everybody is talking about stocks, even your taxi driver. They also sell in a panic every time there is a correction or bear market. So, this is not really buying low and selling high but exactly the opposite. It is not easy to control emotions when your savings are at stake. It is only human to feel excitement or hope or fear or greed. But it’s not smart to act on them in your investment portfolio.
Successful investors do not only have a plan, but they also stick to it. No investor knows with any certainty what the future holds. But history shows that if you abide by these 10 proven principles, your portfolio can weather the storms that will eventually come your way.