ONE: Never invest in a business that you cannot understand.
Invest in what you know. If you can’t understand it then you probably shouldn’t be buying it. Focus on buying investments that you understand. There are tens of thousands of publicly traded companies, investment funds and ETFs (exchange traded funds) to choose from, do your research and pick the ones that make sense to you.
TWO: Some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.
Most news is noise. Media companies sell newspapers by creating fear and sensationalising stories. If it bleeds, it leads. Don’t let them suck you in and alter your investment choices. If you were to take the advice of news pundits every day you would be forever buying and selling investments. Have faith in your decisions. You also need to question whether the talking heads actually know what they are talking about; everyone remembers Jim Cramer declaring Bear Stearns a safe investment moments before it went bankrupt.
THREE: Price is what you pay. Value is what you get.
Price and value are not the same. Whether you buy direct stocks, or you invest in a mutual fund or ETF, you are usually buying a share of a revenue-generating business. The price of a stock is much more volatile than the fundamentals of that business. This provides opportunity and risk for investors. During crashes, stock prices will often fall further than current and future earnings, which creates value and a buying opportunity. Conversely, an increase in stock price doesn’t always mean its revenue is going to grow at the same rate, which can lead to stocks being overvalued. As an investor you need to learn the difference between price and value.
There are many investment models that you can follow. Find one that makes sense to you and have the discipline to follow it. If you are unsure about investing on your own then you should consider using a professional financial advisor. You can read my article on how to choose a financial advisor here.
For the past 15 years I have helped expats in Asia successfully save for their future. All of my client relationships started with a simple conversation about what they wanted to achieve. For more information and advice about investment options, contact me at WFrisby@Hampton-Bridge.com