Friday, July 21, 2006

Investment principles 1-20

As an active investor I spend a lot of time reading about, well, investments and personal finance. There are many theories and approaches out there. Some are obviously better than others. Some of the material that gets published is rubbish. Some is excellent. I reached the conclusion a long time ago that one of the most important things about investing is to formulate some clear principles to use as guidance in managing my investments. While I had a lot of thoughts about what worked and what didn't, I never attempted to put those thoughts in writing. In an effort to be more disciplined in my financial planning and to improve my investment decision making, I have now done so. Here they are:

1. Have a plan. Saving and investing should not be a random process.

2. Have a plan for when things go wrong. Murphy's Law applies to investing as much as it does to everything else.

3. Understand the risks as well as the rewards for each investment and the portfolio as a whole.

4. Understand the costs, charges, fees and other ways in which the value of your investments can be eroded.

5. Understand how time affects you and your investments.

6. Rigorously challenge all assumptions and beliefs.

7. Stress test your investments and your portfolio.

8. Understand the role that external and internal influences play in your decision making.

9. Be passionate about investing, not your investments.

10. Remember that small things are meaningful. A penny saved is $0.01 * (1+((100-marginal tax rate)/100)) earned. A penny saved and invested each day for 40 years is....well, you get the picture

11. Listen to other people, but do your own thinking.

12. Nobody is as interested in your financial well being as you are. Be vigilant. Scams abound.

13. Be open to new ideas.

14. Be willing to admit that mistakes will be made...and must be dealt with sooner rather than later.

15. Procrastination will usually cost you money.

16. Invest in your education.

17. Stay focused when things are going badly.

18. Diversification is mostly good.

19. Keep good records.

20. Every investment should have a purpose, an objective and a clearly understood basis for its selection.

I did come up with a lot more but decided to limit the list to 20. I did try and rank the principles in order of importance, but decided that it was a task that was too subective to be meaningful. Consider the order random. Also, some of the principles overlap or a closely related with each other. An attempt to group the principles fell into the "too hard" basket and was quickly abandoned.

In a fit of enthusiasm, I intend to say something about each of these in future posts.


Bryan C. Fleming said...

Perhaps you should keep listing these out. I'm sure people would like to read them. Hell if you got more post a few a day.

- Bryan

traineeinvestor said...

Hi Bryan

I have more and will add them to the blog once I have elaborated on the first 20.