8 timeless investment principles you can use in any asset classOct 07, 2019
Fads will always come and go in investing as market cycles unfold in ever-changing ways.
Sometimes buy-and-hold investing will be very popular, for example; in other decades it will drift back out of favour as secular bear markets take hold, and as investors lose faith in markets delivering positive returns over an acceptable timeframe.
For example, the buy-and-hold approach would have delivered dramatically negative real returns in bear markets, such as between 1966 and 1982.
It’s fine in hindsight to say you’d have stayed the course and loaded up for the next cycle, but in real time that wasn’t what most average investors were doing through 17 years which might’ve torched nearly three-quarters of their purchasing power, excluding dividends:
As you can gather from the chart above we’re now almost inevitably heading into another period of below-average returns or worse.
At the time of writing there’s been an unprecedented rise in passive indexing – in tandem with a belief of being 100% invested in stocks at all times – supported by an underlying theory that stocks go up consistently over time.
Now you might justifiably say that by not using a log scale the above chart overstates the inflation of the market (it does).
As such, we’ve dragged the below chart back to 1870 using a log scale and inflation-adjusted returns, which presents a more realistic picture.
It shows that long periods of significantly negative real returns have periodically been a feature of markets throughout modern history, including from 1906 to 1921 (-69%), or from 1929 to 1949 (-59%), and 1966 to 1982, in addition to several others.
Of course, in the real world, nobody buys all of their portfolio at the market peak and then never invests again – and this doesn’t mean there’s no place for passive investing – but long-term investors should remain under no illusions about how long markets can run against them for.
Here are our 8 timeless investment principles that you can apply at any time, in any markets, to any asset class:
4 thought principles
(i) Systematic investing – if you don’t have a systematic approach to investing, then on a long enough timeline eventually something will not go as planned and you will fail. Plan accordingly;
(ii) Personality – there are 9 different personality types and we all have our own motivations, strengths, and weaknesses. Understanding your personality type and dominant beliefs will help you to invest with less emotion and more rationally;
(iii) Market cycles/mean reversion – market sentiment swings higher and lower over time, but over time valuations have tended to revert to an average or mean level; and
(iv) Risk hierarchy – some investments (e.g. individual companies) may entail a greater risk of permanent loss of capital than others (e.g. an all-World ETF that holds more than 1,500 stocks).
4 action principles
(v) Asset allocation – consider investments in uncorrelated assets (for example, cash and stocks are uncorrelated, so you might split your capital between these assets);
(vi) Buy low/sell high – exactly what it says on the tin! Buying low and selling high is a timeless strategy for all markets and all asset classes;
(vii) Diversification – there are several ways to diversify, including across multiple investments, by investing in products that are themselves diversified, and across time by staging your entry to investments; and
(viii) Rebalancing – a critical part of any investor’s armoury, to ensure that you are never over-exposed to any single investment position.
I discussed the concept of timeless principles a little further in the video here
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