Welcome to The Purposeful Wealth Podcast and this episode on how a systematic approach to investing provides the best chance of experiencing a successful investing journey - 'Don’t just take our word for it!'
Sticking to some key guiding principles – which are grounded in evidence and logic – gives investors a solid foundation on which to build a sensible investment solution. This short note provides an insight into five of our favourite insights from experienced and accomplished academics and practitioners and explains how these words help us plant our investment philosophical flag in sensible space.
1. A focus on risk management, rather than chasing performance
Quote by Warren Buffet, Berkshire Hathaway 1994 Annual Meeting
‘You don’t find out who’s been swimming naked until the tide goes out.’
The financial media enjoys reporting on top performing fund managers. Humans like exciting stories. Good investing, however, should – to most - seem relatively boring through taking a ‘risk-first’ approach. Ultimately, sensibly considered risks should be rewarded appropriately over time. The risk management process involves deciding which risks one wants to be exposed to in portfolios (such as broad global equity market risk) and which we do not (such as the use of leverage). Managing these risks tightly over time and monitoring them on a regular basis is key.
2. Be diligent and act rationally, with due patience
Quote by Charles D. Ellis, Winning the Losers Game, 1993
‘Activity in investing is almost always in surplus.’
Ensuring any decision made is free from an emotional reaction is a must. Many are prone to making knee-jerk – and sometimes permanently damaging - investment decisions. Taking steps to avoid this is well-advised.
3. Take part and believe in capital markets
Quote by Eugene Fama, Nobel laureate, speaking with The Rational Reminder Podcast, May 2020
‘You’ve got to talk yourself out of the market portfolio.’
Owning a share of companies through investing in capital markets is an effective way for investors to grow their wealth over time. Owning a little bit of everything is not a bad place to start. Luckily for investors these days, one can do so with relative ease through investing in mutual funds. Doing so enables investors to participate in the growth of listed companies from around the world in a diversified manner, avoiding being overly concentrated in a single stock.
4. Keep costs low
Quote by John C. Bogle, Founder of The Vanguard Group, February 2005
‘In Investing, You Get What You Don’t Pay For.’
Cost is by no means the only factor separating better and worse investment solutions, but it is a significant one. Costs can be implicit (e.g. frictional trading costs) or explicit (e.g. fund manager fees). Clearly, any saving made by an investor is retained in the portfolio, rather than being passed off to another party in the process.
5. Stick to the plan
Quote by David F. Swensen, author and former CIO of Yale University endowment, 2005
‘Real-world application of fundamental investment principles produces superior outcomes.’
An investor who can recall their key investment principles stands in good stead to avoid making mistakes. Abiding by some simple guidelines – such as those outlined by the investment mavens in this note – enables investors to employ a robust and repeatable pr
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