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January 2, 2015

10 universal investment truths

It’s that time of the year again, when investment houses will make predictions for the next 12 months – despite overwhelming evidence that short-term predictions are mostly useless (see here). Instead of relying on „expert predictions“ (=coin toss?), you should focus on process and stick to your strategy. Hopefully we can help you a little bit by listing our top 10 universal investment rules. The rules don’t change from one year to the next, it is just the scenarios that we are dealing with.

1. Don’t check your account every single day
Constant updates make investing more emotional than it nees to be. If you plant a tree, you don’t dig up the roots every week to see how it is growing either. Fidelity once did an internal survey to see which of their clients had the best long-term performance – it were those that had forgotten they even had funds with Fidelity and so didn’t bother checking them anymore.

2. Past market corrections are viewed as opportunities, but all future market crashes are viewed as risks
If you can recognize the silliness in this, you are already on your way to becoming a much better long-term investor.

3. Investing is not for entertainment
Don’t we like to brag sometimes about our investment portfolio? About the new ‚sexy‘ investment story we have found, the hot new stock, the Hedge Fund manager where the general public can’t invest? A low-cost investment portfolio with ETF as core holdings sounds boring but has shown to deliver better long-term results. Some may find this strategy boring, but the purpose of investing is not to reduce boredom or allow us to show-off at a cocktail party, but to build long-term wealth.

4. Read past stock-market predictions and you will take current predictions less seriously
Markets are complicated, and human emotions are unpredictable. Unless you have illegal insider information, predicting what stocks will do in the short run is virtually impossible.

5. You are only diversified if some of your investments are performing worse than others
Losing money on even a portion of your portfolio is hard for some people to swallow, so they tend to chase momentum by gravitating toward what is performing well at the moment. For this reason, many investors will always want to tinker with their strategy. They will always feel the pull to chase performance because clearly their strategy is “not working.” But this is wrong. Diversification is about accepting good enough to avoid terrible. Yes, investors sometimes miss out on great when they diversify but the downside risk of being too concentrated in the wrong asset class at the wrong time is just too big as it can completely destroy a financial plan.

6. Trust is good, control is better
If you don’t understand something in your portfolio, always ask. Never delegate 100%.

7. Short-term thinking is the root of most investing problems
The real problem everybody is trying to solve is saving for some goals in the distant future. Either retirement or kids‘ eduction or a house or something similar. But most investors worry about the day-to-day movements of their account. If you can focus on the next 5+ years while the average investor is focused on the next five days, you have a powerful edge. Markets reward patience more than any other skill.

8. Investing is a game of psychology
Success has less to do with your math skills or financial knowledge and more to do with your ability to resist the emotional urge to buy high and sell low.

9. Investors need to focus on what they can control
Investors cannot control where the S&P 500 or any other index will close 12 months from now but they can control the costs of investing, the entry level valuation of their investment and the time in the market. These are the three most important variables that determine investment success long-term.

10. Change your mind when the facts change
We all make mistakes – even the best investors like Warren Buffett. But what differentiates him from the rest is his ability to admit when he is wrong and learn from the mistakes.

We wanted to present here a roadmap that helps you to become a more successful long-term investor. If you are looking for ways to optimize your portfolio or some specific investment ideas, please do not hesitate to contact us at info@ipanema-capital.com.

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