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This page contains pieces of investment wisdom. There are a few tips and some basics that can be used for reference.
Basics
These are the vary basics of investment. Each deserves a decent chapter or a book on its own.
- compounding interest (+ tax shelter)
- dollar-cost averaging
- asset allocation
- diversification
- arithmetic of loss (don't lose money)
Compounding interest is rightly called the eight wonder of the world. Read The power of compounding to learn more. See Wikipedia article for a detailed technical explanation.
General investment tips
These are some general investment tips. They are to be kept in mind when making investment decisions. Click the links to read more about those aspects of investing.
- Mitigate risk.
- Use asset allocation. See the linked page for hints on how to diversify your portfolio.
- Diversify broadly - don't put all your eggs in one basket
- Invest in what you understand.
- Have a long-term financial plan.
- Stay liquid.
- Review portfolio regularly and rebalance.
- Use dollar-cost averaging (article on Wikipedia).
The major point in investment is risk mitigation. All the other listed points are included in that one.
The first practical lesson of risk management is "don't put all your eggs in one basket". This is diversification. So, the first couple of points mean the same thing. Diversification means investing into instruments that are not correlated - i.e. the instruments do not go up or down at the same time. If they are correlated then, if one fails, they will all fail. That is not diversification.
In line with the above, if investing in index funds then add investments that do not correlate to index funds.
Use Dollar-cost averaging. By investing the same amount at different times you will average the purchase price over the investment period. You end up buying more units/stocks when the price is low and less when the price is high.
Rebalancing is a form of risk control. It is similar to Dollar-cost averaging. Value of different asset classes, and therefore the percentage within your portfolio, will change over time. Stick to the original asset allocation will lead to selling the excess value in the asset classes that grew in recent period and buying those that underperformed in the same period. This will result in selling assets that are overpriced, and cashing a profit, and buying assets that are underpriced, creating a potential for future earnings.
Some additional tips by Prof.Burton Malkiel:
- Set reasonable investment goals.
- Lower the costs of investments. This includes management fees, transaction fees, performance fees, etc.
- Rebalance and tax-manage your investments.
Links: Investor Education at 2020.
Investing in bear market
Buy on dips, when price reaches 10% of the known bottom. Buy in instalments, smaller portions over a period of time, not in one go.
Read more in the post - here.
Building Wealth
The most basic rules for building wealth are:
- Spend less than you earn and
- never borrow to pay for anything that depreciates in value.
Some additional tips:
- Pay cash. If you can't pay cash you can't afford it.
- Maintain an emergency fund of at least 3 months of after-tax income. Keep cash in a savings account to cover the costs of living for a period of 3 to 6 months in case of emergencies.
- Separate savings accounts for savings goals.
This creates a distinction in your mind that the money has been dedicated to a particular goal and raises a mental barrier in order to avoid using the funds for a different purpose.
