During bull markets like this, it’s easy to feel a false sense of security that any portfolio will continue to support your needs. As most of us know, change is the only “guarantee” you can count on from the markets.
Our Investment Do’s list focuses on the fundamental tenets of our investing philosophy that have stood the test of time. They aren’t flashy, are pretty simple and are based on common sense and academic research. But, much like dieting, you need to have discipline to stay with the plan once it’s in place. Here’s a list of three core investing tenets to help you ignore the noise and focus on what’s important.
Bargain Shopping in an Efficient Market
As F.A. Hayek, an Austrian economist, pointed out in his Nobel laureate lecture, “we are only beginning to understand how subtle and efficient the communication mechanism is that we call the market.” It gathers and immediately factors in all publicly available information better and faster than any system ever created.
What does this mean in the realm of fiercely competitive capital markets? Simply put, prices are fair. Competition among profit-seeking investors causes prices to change quickly in response to new information, and neither the buyer nor the seller of a publicly traded security has a systematic advantage. Therefore, the current price is our best estimate of fair value. Bottom line—you’ll be hard pressed to find great bargains in the market based on share price because mispricing is quite rare.
Smoothing Out the Roller Coaster
Even though markets work, you’ll still experience ups and downs throughout different countries, industries and asset classes. By owning a variety of investments within your portfolio, diversification helps smooth out some of the bumps by reducing the impact of any single company’s performance on your wealth. Owning a number of asset classes allows you to benefit from the winning classes while minimizing the loss from the losing classes. An added bonus is that diversification locks you into a reasoned, structured investing strategy and takes away the temptation to buy the latest hot stock or mutual fund manager. Sometimes we can be our own worst enemies and diversification can save us from ourselves.
Stand by Your Plan
Travelling the road to a successful investment experience requires more than just a map. Building a portfolio that puts the “Investment Do’s” to work is one thing, but staying on route is something else altogether. Believe it or not, you’re constantly bombarded with information, which we like to call “noise,” that is designed to lead you off course and distract you from your goal. Keeping your hands on the wheel and your eyes on the final destination requires the emotional discipline to execute faithfully in the face of conflicting messages from the media and the investment industry.