- Intelligent investing involves designing a portfolio around a specific set of goals.
- Choosing an appropriate balance of stocks, bonds, and cash is the most important decision an investor makes because it determines over 90% of a portfolio’s return.*
- Index funds outperform the vast majority of active managers over a long period of time; it is unwise to expect a portfolio to deliver significantly more or less than historical averages.
- Market timing is a losing strategy–ignore the media, invest rationally, and stick to your plan.
- Disciplined rebalancing is the most reliable way to buy low and sell high.
- Bear markets are nothing more than temporary sales; wise investors are therefore opportunistic during bear markets.
- Investor behavior is a dominant factor in investment performance; very few investors can invest unemotionally without professional guidance.
- Low portfolio turnover, tax efficiency, and low costs are effective ways to increase total return.
- Inflation is a silent killer—the biggest risk to a long-term portfolio is loss of purchasing power, not loss of principal.
Mistakes That We Can Help You Avoid**
- Investing without a plan–Letting the market be your benchmark when your goals should be the benchmark.
- Confusing speculation with investing—An approach that relies on short-term bets is simply not investing.
- Panic—Believing that the world is coming to an end and that this time is different.
- Euphoria—Believing that the markets will never fall and that this time is different.
- Overdiversification—Holding a large number of redundant investments that dilute your portfolio.
- Underdiversification—Holding so few investments that each has the power to destroy your portfolio.
- Emphasizing current yield over total return—Emphasis on total return from dividends and capital gains can create a rising income stream that keeps pace with inflation.
- Letting taxes dictate your decisions—It is foolish to keep bad investments or not buy good investments because of a reluctance to pay taxes.
- Borrowed money—There is no faster way to destroy wealth than with a poor investment made using someone else’s money.
*Gary P. Brinson, L. Randolph Hood, and Gilbert L. Beebower, Determinants of Portfolio Performance, The Financial Analysts Journal, July/August 1986.
**Based on principles from Nick Murray’s book, Simple Wealth, Inevitable Wealth (www.nickmurray.com)