Seven Investing Principles for Investment Success

The world of investing is complicated, especially for new investors. Undoubtedly, investing can cause a genuine fear of loss among new investors. Moreover, even seasoned investors can be fearful of the investment world in some cases; specifically, the fear of financial loss. This feat could lead to them making irrational investment decisions to avoid making losses. Investors can make bad decisions, get carried away with emotions, and lose more money instead. A study found that people afraid to lose money may even reject opportunities that could result in potentially high gains.

It is not surprising that the investing world appears complicated to people. Given the complex and ever-changing market situations, an endless supply of market news, turbulence in the global economic sphere, and multiple investment choices, investors are quite likely to be confused about their investment decisions. This increases their chances of making a wrong investment decision. In the past 20 years, an average equity mutual fund portfolio has generated returns nearly 1.7% lower than the average market returns. One of the prime reasons for this is investor behavior driven by fear and panic.

However, like any other fear, it is possible to eliminate investment-related hesitations and fears and become a successful investor. If you are concerned about the market conditions and fear the investment world, adopting specific investing principles can help you avoid market pitfalls, handle market volatility, tap lucrative financial opportunities, increase long-term returns, and more. You can also seek guidance from a professional financial advisor who can help create an investment strategy for you based on your risk appetite and financial goals. So, what guidelines should you follow to achieve better investment results over time?

Here are seven investing principles that can help you build effective and fruitful long-term investment strategies:

1. Create realistic and clear financial goals: 

The foundational investment recommendation for all investors is to create a clear financial plan with explicitly defined and realistic financial goals. Ideally, investment goals should be measurable and attainable. The base of your financial goals should not be dependent on exaggerated investment returns, impractical saving figures, or strict spending restrictions. In addition to this, you can categorize your financial goals into three phases – short-, mid-, and long-term goals. For instance, if you are in your 30s and want to save for retirement, then retirement planning can be your long-term goal. However, if you want to buy a car in another three years, it can be your short-term goal. Alternatively, if you want to cover the education expenses of your children, then that can be categorized as a mid-term financial goal. Depending on your goals, you can set a time horizon for each. This makes the financial goals definite, realistic, and measurable. For example, if you own a car after three years, you would have achieved your short-term goal, and vice versa. Once you know your goals, you can develop a reasonable plan to achieve them in the set period. Your financial aspirations and plan can govern your investment choices and future decisions. It is also important to keep track of your financial plan and review your goals and investing strategies every year. 

2. Invest early and invest regularly: 

One of the most effective tips for investing that all financial experts suggest is investing early and investing regularly. Starting your investment journey at a young age can help you build wealth in the long run, owing to the power of compounding. As per the power of compounding, your profits are reinvested into the market to generate higher returns. The snowball effect of the power of compounding gives you the advantage to grow your original investment amount along with accumulated interests, capital gains, bonuses, dividends, and more. The longer your investment horizon, the greater is the potential for your investment returns to compound. The advantage of early investing can be better understood with a comparative example of an early investor – X – who begins investing at the age of 21 and another investor – Y – who begins investing at the age of 41. Assuming X invests $200 per month and Y $400 per month for 40 years both earn a 4% rate of return. In all, X and Y both invested $96,000 by age 60. In this case, at 60, X will have $232,213 in the balance, and Y will have $145,537. This implies that because of the power of compounding, the early investor (X) can accumulate $86,676 more than Y by the age of 60. It is important to start investing early but equally critical to invest often. Keep investing a priority for yourself and adopt a disciplined approach to wealth building over time.

3. Build a diversified investment portfolio: 

An investment recommendation that most financial experts offer is building a diversified portfolio. Creating a well-diversified portfolio with a suitable asset allocation strategy can help you mitigate market losses. Investing all your funds in one particular type of security, company, or region increases your risk as your returns are dependent on the performance of the selective investments. The primary step of building a diversified portfolio is to understand your comfort level with financial losses. This will help you determine your risk tolerance and corresponding return expectations, allowing you to choose investments befitting your risk and return levels. You can diversify your investment portfolio across asset classes, industries, and geographical regions. For instance, it is advisable to build a portfolio with stocks, bonds, foreign securities, and more. This varied mix of securities in your investment portfolio reduces the risk of volatility and improves the chances of returns because different financial markets react differently at varied time intervals. In each market cycle, diverse asset classes (like equity, debt, fixed income, cash, etc.) can lead or lag, responding differently to fluctuating market conditions, inflation, environmental factors, interest rates, etc. You can better tap into investment opportunities across asset classes with a diversified investment portfolio.

4. Minimize taxes and fees: 

Taxes and fees can consume a significant portion of your money. However, true investing focuses on reducing the incidence of taxes and fees on your investment portfolio. Even though markets are uncertain, investment fees are fixed and certain. It is advisable to understand the different fees applicable for each investment and aim to choose assets with minimum fees and higher chances of net returns. For instance, all mutual fund investments have an expense ratio. However, some charge a higher expense ratio than others. As a wise investor, it is prudent to evaluate each scheme and its expense ratio and make an informed decision focused on generating high net returns. Apart from selecting low-cost investments, you can also alter your investment strategies. For instance, investing aggressively for a shorter period instead of low investments for a long duration could help you lower your fees. Low investment fees and related costs mean you get to keep more. For example, you have $10,000 in savings and invest the same in a mutual fund with a 2.5% expense ratio. After 20 years, your mutual fund investment would have a value of $46,022 (assuming a 10% annual return). Alternatively, if you invest $10,000 in another mutual fund with a 0.5% expense ratio, your investment value would be $61,159 after 20 years against $46,022 in the first case. This implies that with smart and informed investment decisions, you can save more than $15,000. Therefore, when selecting your investments, check different aspects, including expense ratios, trading fees, commissions, advice fees, asset management fees, and more. Alternatively, focus on minimizing tax bills. Choose tax-friendly investment strategies like saving money in tax-advantaged retirement accounts 401(k), an IRA (Individual Retirement Account), Roth IRA, etc.), using a Health Savings Account (HSA), making charitable contributions, setting up a living trust, relocating to a tax-friendly state, using tax-loss harvesting strategies, etc.

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5. Evaluate and rebalance your investment portfolio: 

One of the most effective financial principles is evaluating your investment portfolio. Each year the market behaves differently, impacting your portfolio in a certain way. The objective for rebalancing your portfolio is to ensure your asset allocation aligns with your life stage, risk tolerance, and preferences. The first step to rebalancing your portfolio is to check your taxable and non-taxable investments. Assess how much of your money is distributed across stocks, bonds, cash, and other market securities. In the case of mutual funds, ETFs (Exchange Traded Funds), target-date funds, etc., check their division across specific areas and market securities. Once you know the holistic asset allocation, determine the percentage of bonds, stocks, and cash holdings. Per these results, evaluate your asset holdings to match your risk appetite and life stage. For instance, if you currently have 70% in stocks, while your risk tolerance is only 50%, you should aim at redirecting your funds towards other securities like bonds, reducing your stock allocation. Moreover, suppose you are approaching your retirement age and your investment portfolio comprises primarily stocks. In that case, you should ideally aim to rebalance your portfolio to include more conservative securities like bonds, ETFs, index funds, etc.

6. Stay focused while investing and adopt a long-term financial vision: 

True investing depends on long-term financial discipline. Generally, investing can provoke different emotions in investors. During market volatility, some investors might make impulsive decisions; others might become paralyzed, unable to make any sound investment decision or implement an effective investment strategy as needed. However, during volatile market situations, it is beneficial to stay focused on your plan. Keep in mind that progress towards your goals is more important than short-term profits or losses. During a volatile market situation, it is not wise to make emotion-or panic-based decisions. Instead, it is advised to make informed decisions to act only if necessary. Keep your long-term financial goals in mind and wait for the market to recover. Research has proven investors with a long-term perspective have a higher chance of success. Abandoning your investments mid-way or deviating from your planned investment approach can prove costly and compromise your investment results and financial goals.

7. Consider engaging with a professional financial advisor: 

To increase your chances of investment success, it is also beneficial to engage with a professional financial advisor. An experienced and competent financial advisor has the required investment experience and expertise to effectively create an optimally diversified investment portfolio. The advisor will help you form smart and measurable goals and draft a holistic plan to achieve those goals. Moreover, the professional will work with you to understand your risk tolerance and return requirements and accordingly identify low-cost securities that match your risk appetite and return expectations. The advisor will also help you minimize your tax bill by adopting tax-friendly strategies, like maximizing contributions in tax-advantaged accounts, using tax-loss harvesting strategies, creating charitable trusts, investing in a health savings account, and more. When rebalancing your portfolio, you can consult your financial advisor to make better investment decisions. Industry studies have proven that professional financial advice can add between 1.5% and 4% to your portfolio returns in the long run. Engaging with a professional advisor can also help you with your long-term investment strategies.

To conclude

These seven investing principles can help ensure your investment portfolio is well-positioned for the long-term and can successfully navigate temporary market volatile periods. Further, a well-diversified portfolio run by long-term investment strategies also helps you take advantage of opportunities as market conditions evolve. To improve your chances of success in the investment world, consider engaging with a professional financial advisor. The advisor can help you create an optimally diversified, low-cost portfolio aligned with your risk and return expectations. A professional financial advisor is a sound investment for your prosperous future.

If you are looking for guidance on which investment principles to adopt to boost your portfolio returns and to assess whether your investment portfolio is optimally positioned to take advantage of market fluctuations or not, use WiserAdvisor’s free advisor match service to find highly qualified and vetted fiduciary advisors. Answer a few questions about yourself and get matched with 1-3 fiduciary advisors that are suited to meet your financial requirements.

For additional information on retirement planning strategies that can be tailored to your specific financial needs and goals, visit Dash Investments or email me directly at dash@dashinvestments.com.

About Dash Investments

Dash Investments is privately owned by Jonathan Dash and is an independent investment advisory firm, managing private client accounts for individuals and families across America. As a Registered Investment Advisor (RIA) firm with the SEC, they are fiduciaries who put clients’ interests ahead of everything else.

Dash Investments offers a full range of investment advisory and financial services, which are tailored to each client’s unique needs providing institutional-caliber money management services that are based upon a solid, proven research approach. Additionally, each client receives comprehensive financial planning to ensure they are moving toward their financial goals.

CEO & Chief Investment Officer Jonathan Dash has been profiled by The Wall Street Journal, Barron’s, and CNBC as a leader in the investment industry with a track record of creating value for his firm’s clients.