- 1 1. Have A Clearly Defined Goal And Objectives
- 2 2. Create A Proper Investment Process Appropriate For All Market Conditions
- 3 3. Invest And Don't Speculate
- 4 4. Employ The Use Of Low-Cost Exchange Traded Funds (ETFs)
- 5 5. Dollar-Cost Average
- 6 6. Timing The Market Is A Fool's Game
- 7 7. Diversification Matters
- 8 8. Rebalance Your Holdings
- 9 9. Disregard Short-Term Gyrations In Equity Prices
- 10 10. Match Your Risk Profile And Investment Time Horizon
- 11 11. Take Advantage Of Employer Matching
- 12 12. Employee Share Ownership Plan (ESOP)
- 13 13. Investments Promising Exact Percentage Returns - Garbage!
- 14 13 Thoughts To Keep Investing Simple - Final Thoughts
A follower of this blog recently asked 'How do you monitor your portfolio and conduct thorough research when you have a family and a full-time job?' A 'ditch the family and job and focus on investing' is certainly not an appropriate response. This post touches upon 13 thoughts to KEEP INVESTING SIMPLE!
By the way, 'keep investing simple' also applies to single investors.
If time management is a challenge I want you to imagine if you, the family member who makes the equity investment decisions, were to suddenly and unexpectedly no longer able to continue in this capacity? Imagine the predicament in which your partner/spouse would be if they have to:
- manage the family;
- continue with their own full-time job;
- deal with your health issues (illness or death);
- assume the management of the investments you have been managing.
Now let's complicate matters somewhat. Imagine your investment strategy consists of:
- the aggressive use of leverage (February 2021 US Financial Industry Regulatory Authority statistics reflect unprecedented debit balances in customers' securities margin accounts!);
- highly volatile and highly speculative investments (eg. penny stocks, cryptocurrencies, SPAC investments, etc.); and
- time-sensitive investments (eg. options and futures).
Many investors do not like to think of the 'worst-case scenario' but 'stuff' happens. I can't think of a better reason to keep investing simple.
A complex investment process may occasionally work. You are unlikely, however, to stick with it if it is far too complex. Keep investing simple if life is hectic and equity investing is a means in which to help you achieve your goals and objectives and is not your primary occupation.
Apply a little common sense and consider these 13 thoughts to keep investing simple.
1. Have A Clearly Defined Goal And Objectives
In several recent articles, I have stressed the importance of setting a clearly defined goal and short, medium, and long-term objectives. This applies to so many areas in life!
2. Create A Proper Investment Process Appropriate For All Market Conditions
Create a proper investment process that removes your inherent emotions from the equation. Investment decisions made based on monitoring stock charts is truly not a sound investment strategy.
As an equity investor, you become a 'part owner' of a business. Business owners do not make decisions on the company's share price. Decisions are based on the company's underlying fundamentals and senior management's vision of the company.
As equity investors, we should read the quarterly and annual financial statements, read the transcripts of conference calls with analysts, review investor presentations, and keep abreast of any new developments.
A proper investment process is much more important than the companies, funds, or markets in which we invest. It should be a process that is appropriate for all market conditions and should eliminate the need to try and predict how our investments will perform next week, next month or next year.
3. Invest And Don't Speculate
When life is hectic and investment knowledge is moderate, at best, what would possess an investor to invest in speculative companies?
The hallmark of Benjamin Graham's investment philosophy is for loss minimization and not profit maximization. He famously states:
'An investment operation is one which, upon thorough analysis, promises safety of principal and a satisfactory return. Operations not meeting these requirements are speculative.'
John Bogle, the founder of Vanguard, says:
'by absolute, mathematical definition, speculation is a loser’s game and investment is a winner’s game.'
I highly recommend anybody remotely interested in achieving a reasonable degree of success in equity investing read Bogle's The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns.
My daughter, for example, informed me not too long ago that one of her former high school classmates invested several thousand dollars in this junior silver mining company. This person has no investment knowledge whatsoever yet invests in a junior silver ming company. Good grief! I wish I was making this up but I am not; this individual broadcast her poor investment decision on Facebook.
4. Employ The Use Of Low-Cost Exchange Traded Funds (ETFs)
Some investors should not invest in individual equities and should limit their equity investing to ETFs. Properly investing in individual equities is time-consuming in that it consistently requires proper research.
An ETF is a type of security that tracks an index, sector, commodity, or other assets and can be purchased or sold on a stock exchange as with a regular stock. It can be structured to track anything from the price of an individual commodity to a large and diverse collection of securities. Some ETFs are even structured to track specific investment strategies.
The price of an ETF changes throughout the trading day. In contrast, mutual funds are not traded on an exchange and only trade daily after the markets close. Furthermore, ETFs tend to be more cost-effective and more liquid than mutual funds.
An ETF holds multiple underlying assets which makes them a popular choice for diversification.
I invest solely through individual equities and do not employ the use of ETFs. I, however, have been investing in individual equities for several years, I limit my investments to high-quality companies, and I have the time to analyze companies.
5. Dollar-Cost Average
This certainly is not as exciting as making lump-sum investments and watching them rise in value. Investing, however, is not supposed to be exciting. The whole concept is to keep investing simple.
Most investors would be wise to invest on a pre-determined timeframe over the long term. This way, more shares are acquired when share prices are depressed and fewer shares are acquired when prices are elevated. A dollar-cost averaging investment strategy keeps us honest from making emotional short-term decisions.
Before retirement, I was dollar-cost averaging. During retirement, I make periodic lump-sum investments and where appropriate, automatically reinvest the quarterly dividends.
6. Timing The Market Is A Fool's Game
Market timing requires being right twice - when you enter and when you exit. This is more difficult than it sounds.
I am not a 'market timer' but abhor grossly overpaying and will patiently sit on the sidelines until I believe a company's shares are reasonably valued.
Besides, I buy. I very, very rarely sell.
My wife and I, however, are currently at the stage in life where we need to start gradually withdrawing money from our retirement accounts. From a tax planning perspective, we can not wait another decade before we start withdrawing funds from our retirement accounts. If we wait another decade, our mandatory minimum annual retirement account withdrawals will place us in the highest income tax bracket.
I have recently discontinued automatic dividend reinvestment for equity holdings within our retirement accounts. Cash now accumulates in these retirement accounts and I periodically withdraw this cash to fund living expenses, pay taxes, make further investments in taxable accounts. At some stage in the not too distant future, we will need to start selling holdings within the retirement accounts and to become more aggressive with our retirement account withdrawals. Naturally, advice from a tax accountant is essential!
7. Diversification Matters
In the 'Understand the Risks' segment of my recent 9 Traits of Successful Investors post, I touched upon the topic of diversification.
I confess that August 2020 is the last time I closely analyzed the composition of our overall holdings that are scattered over several investment accounts held at a couple of different financial institutions. At that time, our top 10 holdings constituted 43.1% of our overall holdings. The next top 10 made up 20.3% of our overall holdings. Naturally, things have changed since my last review and I intend to conduct a similar review fairly soon.
8. Rebalance Your Holdings
An investment plan should have an asset allocation strategy by which investments are allocated into certain asset classes and target weights. Rebalancing should occur at least once a year so as not to stray from the plan. If the services of an investment advisor are used, an arrangement should be made in which investments are automatically rebalanced.
I made a conscious decision several years ago to only invest in high-quality companies through commons shares and hold no preferred shares, bonds, cryptocurrencies, etc.. I have no intention of deviating from my plan so I do not concern myself with being overweight in equities.
As noted earlier, I rarely sell. If I need to rebalance, I deploy additional funds toward the purchase of shares to bring my investment allocation to within a range I deem acceptable.
A key element I follow to ensure I maintain a well-diversified portfolio is to spread our investments over the following sectors:
- Basic Materials;
- Communication Services;
- Consumer Cyclical;
- Consumer Defensive;
- Real Estate;
- Technology; and
9. Disregard Short-Term Gyrations In Equity Prices
Equity prices rise and fall for various reasons. Many reasons have nothing to do with the underlying fundamentals or the outlook of a company.
Stop watching the talking heads on CNBC, Squawk Box, etc.. These shows are purely for 'entertainment' and might be relevant to investors who:
- want to complicate investing;
- need some excitement in their life.
Nothing is more annoying than people shouting over each over to make their case. Equally annoying are entertainers who press buttons and pull levers to add entertainment value.
10. Match Your Risk Profile And Investment Time Horizon
Consider your risk profile and investment time horizon when setting a clearly defined goal and objectives and creating a proper investment process appropriate for all market conditions.
If you have a better 50% and a family, this adds another dimension to the entire investment decision-making process. Consideration must be given to their risk profile and investment time horizon.
A couple in their retirement years, for example, need to make investment decisions that differ from a family with much younger family members!
Investment decisions must account for short, medium, and long-term cash flow requirements. Holding a portfolio of equities is totally inappropriate if a goal is to acquire a home within the very short term. Similarly, it would be unwise for a young investor to hold the majority of their investments in Real Estate Investment Trusts and Master Limited Partnerships.
Employing the use of very advanced investment strategies when investment knowledge is limited is certainly not a way to keep investing simple. Some options and futures strategies carry substantial or unlimited risk. The failure to fully understand the ramifications of an aggressive trading strategy often leads to an elevated stress level and a permanent impairment to capital. Examples of aggressive investment strategies include but are not limited to:
I employ the use of very conservative option strategies to skim additional income. My most recent very conservative covered call options trades are explained in my Skim Additional Income With Covered Calls. I entered these trades because they met my risk tolerance. Secondly, I know my family's financial well-being is not negatively impacted if something happens to me and I am unable to manage this short-term trade.
11. Take Advantage Of Employer Matching
Some companies offer defined benefit and defined contribution pension plans. The decline in interest rates over the last couple of decades has resulted in many employers having huge pension plan shortfalls. As a result, defined benefit pension plans are becoming increasingly rare.
The very least you can do is to invest enough to get your company match if you have no concept of how much to save for retirement. That could be a 100% return on your money regardless of how the markets behave.
Your employer may offer an ESOP. The financial institutions with which I was employed during my career had an ESOP; employees are eligible to participate after 1 year of employment. These ESOPs allow employees to invest a portion of their income in highly liquid very safe investments (eg. money-market type investments) or the purchase of shares in the employer. At one time the maximum permissible investment was 50% of your regular pay but this was reduced to 25%.
I distinctly remember eavesdropping on a conversation a long-term clerical employee was having with a junior clerical employee about our employer's ESOP just before I reached my 1st anniversary with my employer. This long-term clerical employee was recommending the junior clerical employee invest in the cash portion of the ESOP as opposed to acquiring shares in our employer. This helped solidify my decision to invest all my ESOP contributions in my employer's common shares.
Naturally, my decision to invest in common shares does not apply to everyone. Some people are employed with companies where even the security and stability of a regular paycheque is highly suspect. If this is the case, it is completely foolish to invest in that employer's common shares.
13. Investments Promising Exact Percentage Returns - Garbage!
I know with 100% certainty that I have absolutely no idea what my investment returns will be over the long term. I am, however, reasonably confident my investments will be far more valuable several years into the future if I continue to invest in high-quality companies at attractive valuations.
Tune out people who tell us about the 'can’t-miss investment opportunity'. These people are either naive or charlatans. The concept of investing is to keep investing simple. Follow the advice of people who make outlandish investment return promises if you truly want to complicate your life. The only thing certain with such 'investments' is the returns the 'advisor' will make.
Think about this for a moment. Why would anyone share these 'strategies' when such impressive returns are 'guaranteed? I would keep this a secret.
13 Thoughts To Keep Investing Simple - Final Thoughts
Amazingly, some people like to make things so difficult when things can be so simple. Investing is one area of life in which this applies.
It is certainly not my place to tell people how to invest their money. I am, however, dumbfounded when people with little to moderate investment knowledge disclose the names of companies in which they have invested.
Financial freedom is a journey. Keep investing simple and don't make your journey longer than it should be!
I wish you much success on your journey to financial freedom.
Thanks for reading!
Note: Please send any feedback, corrections, or questions to [email protected].
Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. You should not make any investment decision without conducting your research and due diligence.
I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with the company mentioned in this article.