THINKING about the importance of “practice what you preach” and “put your money where your mouth is”, I wanted to share a few rules I follow, when I invest the little savings I have.
These tips will not allow you to outperform the Market, but will give you the best return at a low risk and at a low cost, in line with the market.
Doesn’t sound too impressive? It is actually better than the returns the vast majority of “active traders” and Fund managers are able to maket.
Time in market, not timing the market
It is impossible to time the market. The only sustainable, long-run strategy is to stay in the market for a long, uninterrupted time. This is why I only invest with money that I am fairly certain I don’t need for at least the next five years.
However, investing your money over the time it takes to raise your children from babies to 18 year olds is a much better time horizon.
You can’t outsmart the market
Every transaction has a buyer and a seller, both think they are making a profitable decision.”
Be aware of cognitive dissonance, the confirmation bias, your optimism and your confidence in your own Investment skills. For every person that outperforms the market, there must be someone who underperforms the market too.
The number of “experts” who consistently outperform the market for an extended period of time is increasingly small. There is no way to know in advance which fund or fund manager is that ‘expert’, because they are lucky, not talented.
This means I favour a boring, passive investment strategy, instead of an active one. Bonus: it costs much less of my time.
Small costs add up over time
I hate transaction costs and I don’t believe in paying a yearly management fee of up to 1% or 2% to a fund manager who claims he can outperform the market. I therefore buy ETF trackers, exchange-traded funds.
An ETF simply copies an index, such as the Dow Jones or the S&P 500. ETF’s are very liquid because they are traded on stock-exchanges, similar to stocks.
Because copying an index doesn’t require “rock star” fund managers – and ditto their exorbitant salaries – management fees for ETF’s that track indices are as low as 0.10%.
Though both fees might seem like small figures, the power of compound interest combined with my investment horizon creates a huge impact at the end of the line.
Don’t put all your eggs in one basket
Diversification of assets is a key ingredient for any robust portfolio. If some industry, geography or asset class is going down, another one is going up, which protects my portfolio from losing value.
That’s why I don’t believe buying a (second) property as an investment is a wise investment for Malaysia’s middle class.
It puts a large share of your assets in a single piece of real estate and makes it quite illiquid. Do make sure your eggs have as little correlation as possible with each other: you don’t want everything to move in the same direction.
In order to diversify, I invest (through ETF’s) in emerging markets and developed markets, Europe and Japan, gold, real estate and bonds.