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 Financial Happenings Blog 
Wednesday, May 28 2008

The Australian's Wealth supplement published today contained a really useful article outlining the simple but central rules of investing - 10 golden rules for successful investment.

 

The rules were:

  1. Invest regularly
  2. Stay the course
  3. Diversify
  4. Avoid get rich schemes
  5. Regular reviews
  6. Get the structure right
  7. Borrow to invest
  8. Look long term
  9. Seek professional advice
  10. Spend less than you earn

The article provides a good summary but in our opinion would benefit from a re-jigging of the order of items.  We would also suggest the removal of borrowing to invest as we do not consider that this is necessary for investment success.  Borrowing to invest increases the risk of a portfolio.   Sure, if the returns from the investment are greater than the cost of the loan it will be a successful strategy.  If not it can be a good way to destroy value.  Many do not need to take on this extra risk to reach what is a successful result.  Therefore it should not be included as a rule.

 

Finally we would include the need to keep investment costs low to round out the list.

 

Our order would look more like this:

 

  1. Spend less than you earn
    1. Before you can invest you need to establish and continue to build a capital base from which to invest
  2. Seek professional advice
    1. Unfortunately this seems a little bit of self-interest, but nevertheless good quality professional advice put in place early will pay for itself.  Professional advice should first look at the risk-free strategies such as reducing tax, getting structures right and then assist with identifying the actual investments
  3. Get the structure right
    1. It is important to look at where investments are placed in terms of superannuation or non-superannuation and in who's name
  4. Look long term
    1. Investing in higher risk assets such as shares and property requires a long term focus of more than 5 years.  There have been period through history where higher risk asset classes have had periods of negative performance for more than 5 years.
  5. Diversify
    1. The old saying rings true - don't put all your eggs in the on basket.  It is essential to invest across a range of asset classes and assets within those classes to avoid the risk of one or two individual asset collapsing and taking your whole portfolio with them.
  6. Keep costs low
    1. Unfortunately this was left off the list in the Australian article.  We see this as really important.  High costs eat in to the returns of investors and inevitably lead to poorer performance.
  7. Avoid get rich schemes
    1. Choice of investments should take into account the trade-off between risk & return.  If an investment promises high returns, make sure you understand the risk involved.
  8. Invest regularly
    1. Investing regularly not only builds the portfolio but also takes out some of the timing risk i.e. investing everything today and tomorrow the value falls sharply.  If you regularly invest over time, even if markets fall you will be buying new investments at lower prices.
  9. Stay the course
    1. Jumping in and out of investments is a great way to destroy wealth because research shows that  investors tend to buy at high prices and sell at low prices.
  10. Regular reviews
    1. Even though you should keep your follow your investment approach for the long term, circumstances will cause the need to re-assess the strategy such as a change in life circumstances or the need to re-balance after a period of strong growth in a particular asset class

Regards,

Scott Keefer

Posted by: Scott Keefer AT 07:36 am   |  Permalink   |  Email
 
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