The in’s and out’s of investing can seem like some mysterious cloak and dagger world not meant to be understood by the average person. Figuring out what to do with your money can feel like the most daunting task–almost too complicated to have the energy to deal with.
While it may be tempting to simply hide it all under the mattress or in the freezer like a drug dealer, but actually there are some basics to the whole investing thing, and President and Wealth Advisor Jeff Griswold of Merit Wealth Managment, located in Bend, Oregon shares with us his ideas for where to put your money to keep it safe and how to possibly even make a bit more.
1. Markets Are Efficient
Public information is of little fundamental value. New information is so quickly incorporated into asset prices that use of this knowledge cannot be expected to consistently produce superior risk-adjusted returns. Information that is not public is also of no value, because it is illegal to trade on it. In other words, you can’t game the system; that’s gambling not investing.
2. Risk and Expected Reward Are Related
Investors who expect or need to achieve higher returns must accept the associated risk. Equity-like returns do not come without commensurate risks. When it comes to investing, there’s no such thing as a “free lunch”; there is no promise of high returns without high risk. Anyone who tells you different is peddling a “free meal” you don’t want to eat.
3. Diversification Works
Global diversification across a variety of imperfectly correlated asset classes is the most effective way to reduce risk. (Correlation is how similarly different investments perform. The higher the correlation, the more similar the performance and, thus, the lower the diversification.) AKA Don’t put your all your eggs in one basket!
Diversification is always working, whether we are pleased with the immediate results. Diversification should be thought of as the equivalent of buying insurance against having all of one’s investment eggs in the wrong basket.
4. Markets Are Unpredictable in the Short Run and Even in the Long Run
In the short (or even long) run, anything is possible. In the long run, we expect that equity markets will rise more than fall. Individuals who correctly predict short-term market movements should likely attribute their results to luck rather than skill.
5: Discipline Is Key to Successful Investing
For far too many investors, the variable that ultimately determines the results of their portfolio is not investment returns but investor behavior. Emotions can lead us all to make poor decisions at the wrong times. It is easy to remain disciplined during strong markets. However, it is far more important to do so in down markets and avoid the far-too-human propensity to sell at market bottoms. Thus, the role emotions play in the success of an investment strategy cannot be overemphasized.
As Griswold explains, understanding a few of these basic concepts, will keep you well ahead of the majority of the investing public. No matter where your plan goes, it’s important to continue to evaluate your individual risk tolerance, build a diverse portfolio and implement regular and disciplined techniques. Having such knowledge changes the way you invest.