Guest Post By Adebayo
Investing is not just about picking stocks, bonds or real estate. You don’t invest and then hope for the best. That is a recipe for failure, unless you enjoy gambling with your money. No investment is without risk and the only thing we can really do is to mitigate our risk as much as possible. The best method to invest, is to follow the set of rules and learn from professional investors-the pro.
If you want to invest like a pro, you should have a long-term investment philosophy that you abide by. To have long term success, it is important to have a solid investment strategy and be disciplined in your approach. This will ensure long-term success.
You should determine your investment philosophy first as it will be the basis for your investment procedures and policies as well as long-term plans. An investment philosophy should be based on reasonable assumptions and expectations of how historical information can serve as your guide when making investment choices.
In this article we will talk about
- Investment philosophy
- Investment strategies
Your investment philosophy should define how you’re going to respond to market volatility while abiding by your investment principles. It keeps you on track with those guidelines. This defines your core beliefs. The basic outline of a good investment philosophy or policy is divided into three parts.
- Set your time horizons. A good investment philosophy outlines a more exact time frame. If you are planning to retire in 30 years, your investment philosophy should be different from someone who is going to retire in a few years. The former can afford to go all into stocks or 90 percent stock. Someone retiring in the next few years will not be able to bounce back from a market correction or bear market if it happens.
- Define how to measure and deal with risk. The higher your expected returns, the higher the risk will be. Even, if you have everything planned out, natural and man-made disasters can happen at anytime. If they do happen, you will know how to deal with them properly.
- Outline your core beliefs on asset diversification. Is it passive or active? Do you prefer a strategic approach or a tactical one? This part of your investment philosophy will be your driving force in creating investment strategies and building a foundation to depend on when your strategies need tweaking. For example, some people prefer the physical investment they can touch, like real estate. Others are alright with virtual investments like stocks and if they want to dabble into real estate, they find a way to do it via REIT (Real estate investment trust) or crowd funding. This way, they avoid doing the dirty work of dealing with tenants or property managers.
- Be disciplined – Follow a strict approach and be disciplined, when defining investment strategies. Don’t rely on trends. Instead, focus on your time horizon, asset allocation and risk tolerance. Your time horizon doesn’t end when you retire. You would have to make adjustments to avoid running out of money. An investment strategy should focus on the time for certain investments and the long-term horizon of an investment career. Follow strict guidelines when re-balancing asset allocation, especially when there are sudden market changes. Whether you measure your risk tolerance against a specific benchmark or other factors, you should always stick to your predetermined limits. After surviving a few market cycles, you will probably start to see patterns of popular investment companies getting sudden substantial gains. Success, however, was short-lived for some of those companies as their substantial gains were unwarranted. Don’t shy away from markets as they’re falling or use too much leverage when they are moving up. Follow a set approach and focus on short-term successes. This is one of the best ways to invest like a pro.
- Focus on the long term – Most people fear losing their money to the bear market. What if I invest my money the day before the market crashes? If you are investing for the long term, history has shown that you will still make money over a long period provided that you did not withdraw your money during the crash.
You don’t believe me? Let’s go through an example, the 2008 market crash.
The S&P 500 hit an all-time high in late 2007 at $1,576. The S&P 500 was slashed to a low of $667 right after the bear market that occurred right after the high. Let’s say you invested $10,000 in S&P 500 hours before the crash. That is the worst possible time to invest right? With dividends included, you’d have around 6% annualized returns by now. You would have gained about $8,700 on that $10,000 dollars investment.
- Get advice from successful professional investors: I am a firm believer of DIY (do it yourself) investing, however, I am not ashamed to tell you to seek professional help when you are unsure of what you are doing. This can help you stay on the right track and to avoid common errors when investing. Always strive to improve your financial knowledge daily by reading books and finding a mentor like Warren Buffet.
Remember that everything starts with a solid investment philosophy. It’s the foundation that creates the right direction for your investment strategies and the paths to follow. You should also avoid any temptation to outperform markets by large margins. Don’t deviate from your investment strategies and philosophy. You can try to outperform markets occasionally, but it’s almost impossible to beat the markets constantly. Study the investment goals and plans of successful investment companies and pick up some points that you can use to create your own strategies. By sticking to your investment philosophy and strategies, you can invest like a pro and avoid substantial losses.