All the strange new words, decisions to be made and complex ideas can easily make people who are new to investing feel overwhelmed by the concept of it. The several bits of conflicting ideas gotten from friends, family, online sources and even strangers don’t help either. All this could make you feel like you should avoid the subject completely. But you don’t need to be an expert in finance to succeed in investing. Most of the decisions you make for investment success are fairly simple ones. The trick is to focus on what you can control and not worry about what you can’t. The amount of wealth to be generated from investing is determined by several factors.
- What you invest in: Research shows that up to 90% of the investment returns you receive is more dependent on the kinds of things you invest in than the kinds of investment choices you make. The term for this is “asset allocation” – that means how you divide your money among the different types of investments. Simply put, the mere decision to invest in the stock market will have more impact on the returns you get, but the specifics matter much less. It’s general knowledge that stocks represent ownership in a company and offer the highest potential return, but also have the highest risk of loss. This makes stocks a good place to invest your money long-term, but is a poor choice for short-term investment success. Bonds, on the other hand are actually loans you give to companies. And just like any other loan, they pay an interest rate and over time the entire loan is paid back. They don’t offer as much return as stocks, but they also carry less risk.
The big decision to be made is essentially how much of your money to put toward each. The more you put in stocks, the higher your potential return, but the higher your potential loss as well – especially in the short term. A good rule of thumb is to be comfortable losing half the money you have in stocks in any given year without changing your plan. So if you have 60% of your money in stocks, you should expect to face about a 30% loss in your investments at some point in your life (though it may bounce back over time).
- The rate of return: The fact that we want to earn a higher rate is the reason why we spend all the time attempting to pick winning stocks, the best funds, or the most astute market forecaster.
Unfortunately, the actual return we earn is the one factor that’s essentially out of our control (unless we’re willing to settle for guaranteed CD-like returns). No matter how hard we study or how much we know, we can’t predetermine exactly what our rate of return will be. Therefore, it’s best to put our focus on where we have control.
- Leave it alone: There shall come several times when you feel tempted to change your investment success strategy. Don’t. One very important factor to investing success is: Once you’ve started investing, leave it alone. Resist the temptation to sell off the component of your allocation plan that’s lagging; the reason you have a diversified allocation is so that some pieces will lag while others flourish, and vice-versa.
When the market is up, you may want to be more aggressive. When the market is down, you may want to get out. When your colleague is bragging about the stock she just bought, you may be tempted to buy it, too. A lot of investors give in to these temptations and end up buying high and selling low, just the opposite of what you want to do.
To avoid that, you’ll have to tune out the noise and keep doing what you set out to do, no matter what kind of craziness is happening all around you. Don’t let the news of the day change your mind. It’s not easy, but that consistency will keep you on track through the ups and downs.
- Have a good teacher: You can borrow a leaf from business magnate Warren Buffet. Though he didn’t have a clear investment success strategy when he started, it began to take shape after he read “The Intelligent Investor” for the first time in 1949. Buffett eventually attended Columbia Business School where he trained under the legendary value investor, and author of the The Intelligent Investor, Ben Graham. Buffett’s investment success philosophy has developed over time, but one major brushstroke hasn’t, and it is a Graham adage he shared in his 2013 letter to shareholders: “Price is what you pay, value is what you get.” We can’t all go to Columbia, but we do have access to books written about or by legendary investors, and the opportunity to seek out intelligent people to learn from.