As much as we hear talk of the “new normal” from prominent investment personalities, we believe that it’s just another version of that fateful proclamation heard just before the tech bubble burst in the late 90s – “it’s different this time”. The fact of the matter is that the same fundamental principles that have governed prudent investing over the long run are just as important today as ever. Perhaps even more so.
Sure, conditions change, and adapting to change is a core competency of good investment management but, that said, there are some fundamental truths that we hold dear. These are, in no particular order:
- If someone says they can time the market, walk away. It’s been said that “The Hall of Fame of market timers is an empty room”.
- Adequate diversification is essential to controlling risk. Many eggs and many baskets. It’s fun to talk about our winners but rarely do we discuss our losers. Think WorldCom and Enron.
- Working with an investment manager to build a solid portfolio is like dining at a fine restaurant. The quality of the chef and the ingredients matter. A good investment manager utilizes research, experience, and instinct to identify probable winners and losers and achieve superior returns. Seek out an advisor with a well-articulated, proven investment process.
- How your funds are allocated among growth and income investments is the most critical determinant of long-term success. Get it right and you will be successful over time. Get it wrong…
- Nothing is risk-free. The interest in your FDIC insured savings account is losing money after taxes and inflation. In fact, loss of purchasing power over one’s lifetime is far more damaging to one’s financial security than a short-term decline in the stock market.
- Yes, stock prices can be volatile. But in a period of rising interest rates even the “safest” U.S. government bonds can lose significant value. When you see a well-known celebrity pitching an investment product, walk away. They look good on camera and can read from a script but don’t have a clue of the risks involved, or worse… don’t care.
- Buying when markets are high on a wave of euphoria or selling when they are severely depressed is the typical behavior of an inexperienced or undisciplined investor. Taking the contrarian view and going against the herd takes courage, discipline and vision and is nearly always the better course of action. Think Buffett.
- Ignore the noise and talking heads. Many commentators capture the spotlight because of their extreme views and likely have an agenda that conflicts with yours. Emotional decision making will lead to ruin.
- Pick your investment advisor carefully. Check credentials, get references, and ask if audits and regulatory exams are regularly conducted. Don’t accept bold promises on faith. If it sounds too good to be true… think Madoff.
- When investing in stocks for growth, time is your friend. Conservative savers will often equate the stock market to gambling. At the casino, the longer you play, the greater the probability that you will lose all of your money. With a well-diversified and disciplined investment plan, the longer you “play”, the greater the odds that you will “win” and achieve your goals.