Seven principles for the common sense investor
Many of us have access to the Internet and can research companies, stock indexes etc. Good old-fashioned advice from an industry expert however cuts down on your research time and points you in the correct direction without it taking up most of your precious leisure hours.
Put Your Money To Work
Investing is about putting money to work in effective ways to make more money. The most effective way to put your money to work over the long term is in well-run, profitable companies either directly or through collective investment schemes to benefit from diversification and spread of risk.
Invest in Good Companies, Avoid Bad Companies
The common sense investor entrusts his money in companies that put money to good use. Good companies will use money in effective ways to produce more wealth. Check their track record. Though not necessarily an indicator of future performance, a bad company rarely improves as effectively as a good company.
Beware of Following Fads
Following the crowd can be disastrous for the common sense investor, if the price of an investment is dictated by short-term exuberance rather than long-term rationality, it should be avoided. If markets are too extreme in a sell-off for a good company, you should be ready to buy. In fact, the common sense investor can take advantage of the fact that in the short term, stock market exuberance is often irrational.
The Power of Compounding Interest
Give your money as much time to grow as possible. If your money doubled every five years, then five thousand dollars would turn into $320,000 in thirty years. Over ten years, it would only turn into $20,000. Big difference. The earlier you put your money to work, the longer it works for you, and the more wealth you generate.
Some Debt is Good Debt, But Most Debt is Bad
Why pay off a debt if the rate on your loan is lower than rate you can achieve by investing your money instead? Many people make the mistake of trying to pay down their home mortgage early, but this is often unadvisable for several reasons. First of all, the money you pay towards your mortgage is not liquid and gets tied up in your home until you sell. Second, a mortgage is often tax-deductible. You can’t take advantage of this tax break if you avoid the interest. Having said that, most debt should be avoided. Never sustain credit card debt and try to avoid all debt that will be used to purchase items that depreciate (e.g. cars, clothes, toys).
Employ Disciplined Principles
Invest regularly and intentionally. Force yourself to put your money to work, but don’t just throw your money at any investment. Choose your investments wisely. Don’t chase after fads. Fight your emotions. If you feel like selling (the market is doing badly), you should probably consider buying and if you feel like buying (the market is doing well), you should probably consider selling.