Fortunately, the economy and the financial markets have recovered to new post recession highs. Most of us know that story. We have all lived it the last several years.
Today
Even though dividend growth stocks are my primary investment focus, we still own some ETF’s as well as closed and open end actively managed mutual funds. Our investments are internationally diversified across a wide spectrum of bonds, equities, commodities and real estate through both taxable and tax advantaged accounts.
What’s Next?
It will be interesting to see what happens when the next bear market rolls in. Why? There is a whole generation of young investors that have never experienced large losses on their investments. And, many of the rest of us have forgotten how it felt. Or, believe it won’t happen again. What will cause the next bear market and how will we react? I don’t know. Only time will tell.
If you don’t believe me, will you believe Warren Buffet? In his latest annual letter to shareholders he warns that losses of 50% or more are not only possible in the future, but inevitable. My past experiences suggest he is right.
Investing Principles
The best way, in my opinion, to handle this uncertainty is to practice solid, fundamental investing principles. We all need to start somewhere. A strong foundation to work from is a must.
Here are 15 investing principles for you to consider. Look for more detail on each one of them in past articles and future posts.
A Few Golden Rules to Get us Going
Start early. Building wealth through investing takes time. The earlier in life you start, the better your chances for success. Not everyone is as fortunate as me to start at 10 years old. But that’s okay. If you haven’t started yet, start now. It will never be earlier than today.
Avoid market timing. Few people know which direction the stock market will go next. Or, when it will suffer a correction. So, don’t try to time the market.
Invest for the long term. Markets and asset prices go through up and down cycles. However, over the long run, you stand a better chance of earning positive returns on your investments.
Make a Plan
Determine your investing objectives. Is your objective capital appreciation, income or total returns? Are you investing for retirement many years away? Or, to make a down payment on a house in a few years.
Know your risk tolerance. How will you react when you lose money. If you will sell at the first sign of a loss, you are risk averse. Therefore, your investments should be very conservative. Of course, less risk likely means less reward.
What’s your strategy? What will you invest in? Individual stocks, ETF’s, real estate, certificates of deposit? Where will the money to invest come from? How often will you make investments.
Determine your asset allocation. Asset allocation is the mix of assets you hold. Cash, bonds, stocks, commodities and real estate are some of the major asset classes. Most noteworthy, asset allocation is one of the primary drivers of investment returns. It should be consistent with your risk tolerance.
Execute Your Plan
Diversify your holdings in each asset asset. If you hold stocks, bonds or real estate, don’t just own one company or property. Own a portfolio of several, or invest through a diversified fund that holds many. Also, consider international investments. With diversification, if one investment goes bad, it won’t take your entire investment portfolio down with it.
Know what you are investing in. Do you understand what you are buying and why you are buying it? Research your investments. Either that, or stay away.
Invest on a regular basis. This strategy is known as dollar cost averaging. It reduces your risk of putting all your money into an investment at its peak price.
Reinvest all dividends. If you do not need to spend your dividends, reinvest them. DRIPs are one method where the dividend is automatically reinvested back into the security that paid it. Another method is to let the dividends accumulate in cash and reinvest them in a lump sum into an investment of your choosing.
Keep Costs and Taxes Low
Minimize investment costs. Focus on low cost funds or individual securities. Furthermore, keep trading to a minimum to avoid transaction fees.
Minimize taxes. Also, minimize trading to avoid capital gains taxes. In addition, utilize techniques like tax loss harvesting.
Use tax advantaged accounts. Maximize your 401k and IRA options or their equivalents in other countries.
Adapt as Circumstances Change
Monitor your investments. On a periodic basis monitor and review your holdings against these principles. In addition, learn from your mistakes. Most importantly, make adjustments as your circumstances change.
Conclusion
So, that’s my 40 years of investing experience poured out in a blog post and some key principles I have learned. And now, what are your thoughts? In addition, have I missed any investing principles you think are important?
This article has been republished with permission from Dividends Diversify.