Every financial journey must begin somewhere. As is the case when establishing positive habits designed to better ourselves in the long run, the best time to begin mapping out and taking control of your financial well-being is yesterday. Whether your are at the beginning of your investing career, or further along, a few things will always be fundamentally important…
Make a plan. Stick to the plan.
There is no one perfect investment, perfect solution, or ideal place to store your savings. So how does one go about deciding where to put their money and why? A good place to start is with a solid financial plan. Why are you working and saving in the first place? What are your long term financial needs? Do you have any current liabilities, do you have any major expenses coming up in the next couple of years?
Rather than trying to create the perfect investment portfolio, it is much easier to come up with a good plan. Summarizing your current position, your resources, and your financial goals will bring the clarity necessary for the next step of organizing your assets to their proper investment allocations. It will help you to understand and make peace with the regular financial sacrifices that you will need to make for the rest of your career, if you want to maintain a good quality of life for yourself and your family later on.
Don’t put all your eggs in one basket
This simple yet powerful proverb is heard by most people a number of times throughout their lives. But what exactly does it mean? Is it recommending that you simply have your savings in more than one bank account? Well, that is a start. Spreading your cash savings across separate banks would reduce certain risks, like institutional risk or credit risk; which while small, is worth doing. However, at the heart of the idiom is the necessity for diversification. Not only should you ensure you are investing in different assets, but be sure to invest in different types of assets. For instance, buy assets that complement each other; so that if one goes down, the other assets you hold may be unaffected, or even go up. As a part of your plan also have long-term assets specifically matched to your long-term liabilities. These may have less liquidity and higher risk, but more potential for growth. Likewise, match your short-term goals with short-term investments- with more liquidity and less risk, but also less growth. Splitting your savings and financial plan into three unique investment accounts has proven to be an effective strategy for many people.
Keep the big picture in mind
Unless you are an avid day-trader or stock-picker, it is probably not imperative that you check in on the performance of your investments or the market every single day. The tide will come in, the tide will go out- as will the day to day performance of your portfolio. Also keep in mind that most mainstream media outlets, even those catering to the world of finance, sell papers and clicks with daily hyperbole and hysteria is great for business. Keep abreast with general trends, and reach out to your advisor if you have any specific questions; you don’t need to be a slave to the news. Similarly, if one of your investments out of the entire portfolio is doing poorly, this is not necessarily a reason to pull the plug and go home. With a well-diversified portfolio, at any given time of any given year, it is expected that at least some of the positions will be down. It is a near impossibility to have an instance whereby all asset classes are up (or at least, it should be, if you are managing correlation effectively).
Time in the market, not timing the market
A common wisdom is that knowing when to time the market is the secret to financial success. Although some of the most famous names in investing have made their fortunes by calling when the market would go up, and then reversing their positions to make money again when the market goes down; this simply is not a tenable strategy for the vast majority of people. Many have tried, and almost all of them fail. The only tried and true, proven method for investment success is discipline and consistency. Picture yourself as a net-buyer of assets for the foreseeable future, and stick to that self-image. Prices will go up, prices will go down, and you will continue to accumulate assets. Over time and with a properly diversified portfolio, your assets will produce wealth in the form of interest, dividends, and capital appreciation.
No risk, no reward
Everyone wants an investment with high returns and little to no risk. Who wouldn’t want that? However, the reality is, in principle these sorts of things just are not possible. One way to look at the problem of risk vs. reward which is often left unconsidered, is by thinking about the other side. For example when making an investment; think, ‘what about the other guy?’ To buy an investment, someone has to be selling or offering you that investment opportunity. Who am I to demand a profit from the other person without assuming a relative and sufficient amount of risk in exchange? Because if you think about it, that is essentially what the vast majority of investing is. You as an investor are taking on a small amount of risk that the other side wants to off-load; and in exchange you receive a return. Therefore, risk and return will always go hand in hand. If you want to grow wealth, or generate investment income, you will need to be willing to accept at least some level of risk.
Consistent periodic investment produces better results
Behavioral patterns and emotional inconsistencies manifest themselves daily in the investment world. When the market is up and the news is positive, people rush headfirst into markets. When the market is down and the headlines are doom and gloom, people often sell at the bottom or stop buying. Simple arithmetic is all that is required to determine that this is not a wise or a successful investment strategy. Instead, an investor would be best served by sticking to the logical side of their brain, and riding out the regular ups and downs the market cycle. Accordingly, sticking to a consistent asset accumulation strategy, and relying on unit cost averaging is an effective method for smoothing out your risk, and achieving better performance in the long run.
Take advantage of advice
Investment tips available on the internet are sufficiently voluminous to fill the available leisure time of more than one lifespan. However informative as they may be, they do not match the value of sitting down for a conversation with an experienced financial adviser. Everyone’s situation is unique, especially those living and working outside of their home country (Japan included) . There could be any number of characteristics of your career, personal, or financial situation which breaks the cookie-cutter mold. In addition, during volatile periods in the market, a seasoned professional can help remove the emotion from investment decisions and help you take an objective view of your financial situation.
[ Sources ]
– Diversification strategy and profitability – Richard P Rumelt, Strategic Managment Journal , Vol 3 Issue 4
– On Market Timing and Investment Performance. II. Statistical Procedures for Evaluating Forecasting Skills – Roy D. Henriksson, The Journal of Business, Vol 54 No. 4
– A Risk‐Reward Framework for the Competitive Analysis of Financial Games – S. al-Binali, Journal Algorithmica, Vol 25 Issue 1