4 Key Principles of Investing

Posted in Blog
04/02/2019 Mduduzi Luthuli

A lot of investors, particularly beginners, believe that there’s some mysterious secret to making money in the stock market. In truth however, there is no secret at all but principles — principles every astute  investor needs to know and follow.

Knowing how to invest money is the foundation for financial success. It is the root of what separates the rich from the poor. If you’re thinking about how to successfully build up a portfolio capable of providing you with a sustainable passive income in your senior years, consider these four key principles

Start Early

Everyone’s biggest financial challenge is saving for their retirement. It’s the largest amount of money you’ll have to save in your lifetime, and unpredictable windfalls notwithstanding, the only way to accomplish it is to save regularly over a long period of time. But if you start to save early on in your career, the prospect becomes less daunting.

The earlier you start investing, the longer your money is in the market earning an above inflation return, to set you up for an income stream in retirement. You’re building up one large pot to give you a sustainable income for the rest of your life. So, if you want to make saving for retirement a whole lot easier for yourself, start now, if you haven’t yet.

At this point I’m sure your mind is probably buzzing with excuses why you can’t — how you really need the money now, how you’ll start when you make more money, how you can get to it later — but the truth is, there will always be an excuse. Chances are that when you do get that raise, you’ll may want to save for a house, or maybe you’ll want to save for a wedding or save for your kids’ education.

There will never be an optimal time to start investing for retirement. You will always have to do it against competing priorities. So, learn to do it at the same time as these other demands on your life.

Invest like a Shareholder

If you’re buying stock, you’re essentially becoming a shareholder in a company and thus are assuming ownership interest in that company, no matter how small. As a shareholder, you need to have a trusted selection process for how you’ll buy stock.

Critical to note is that although the stock price should not be a sole criterion, it should form a key component of your selection process. If you buy an asset (stock) for less than its real value you have a margin of safety. The best plan to lower risk is to buy assets at a price that is lower than the real or intrinsic value. A low price means greater upside appreciation if conditions are favorable. At the same time, a low price provides a margin of safety if circumstances are not ideal. Often, a good company will dip in price due to the market or sector it exists within – which could present a good buying opportunity if the criteria you establish are being met.

Initially aim to invest in industries and companies familiar to you. Understanding something about the industries or companies you invest in will make it easier to stay current on industry trends and company news. If you are interested in a company you do not know, but hear a lot about, research it first. Once you invest, aim to follow the company on a monthly basis.

This is what most investors miss. The ability to follow set rules diligently. When a company no longer fits your criteria, sell. If it does, buy.

Avoid Distractions

Distractions are one of the biggest problems facing all investors, including seasoned investors. The problem with always following the latest trend, craze or stock market hype is that there’s a new one just about every day. If you spend too much time chasing too many strategies (even if they seem reasonable) you won’t be able stay with any one of them long enough to ever profit from them, so what’s the point?

Changing strategies frequently, ensures you lose all sense of long-term direction. This is the very definition of the word distraction when it comes to investing — it’s anything that takes you away from your long-term plan.

Keep Tabs 

At least once a year, take a fresh look at your portfolio. Over time, market swings can throw your asset allocation out of balance. When this happens, you can move money between asset classes to keep your portfolio in line with the asset allocation you want. Your asset allocation, how you divide your portfolio among different asset categories, will be the biggest determinant of your investment returns. I find this is where many investors fail because they put little thought or effort into their asset allocation strategy.

Bottom Line

No one cares about your money more than you do. Technology and the internet have brought down transaction costs and provide the means to get information and guidance instantly at a very low cost. There has never been a better time period for an informed investor who is willing to put a little effort into investing.

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