4 Lessons for Successful InvestingFinancial Planning Insights Investing Behavioral Finance Lifestyle
One of history's greatest investors, Benjamin Graham, gave us 4 lessons for successful investing. Through his storied investing experience he gave us these lessons to help investors find success. If you heed his advice you are more likely to be successful and accomplish your financial goals
They are as follows:
- Don’t invest with borrowed money
- Never pay too much for the prospect of future profits
- Never count on the greater fools to bail you out of reckless risks
- And, above all else, your results depend much less on how markets behave than you YOU behave.
The first lesson is not to invest with borrowed money. This lesson may seem relatively simple. The costs associated with investing with borrowed money or on margin oftentimes outweigh the potential benefits. With rising interest rates, the cost to borrow this cash to invest is now higher and will go higher as the Fed increases interest rates. In order to make this gamble pay off your investments will have to earn you more than your given interest rate. You will have to achieve positive arbitrage. With the increased volatility we have experienced this year this risky bet is now much harder to accomplish.
The second lesson of not overpaying for the prospect of future profits deals with the fundamental reason we invest in stocks. As a stock owner, you participate in the given companies’ financial success. Stocks rise because the prospects of said company’s profits are expected to rise. In order to be a successful investor, you have to pick companies whose value is attractively priced. This is done by looking at a company’s price-to-earnings ratio. Instead of completing this analysis on your own, it is often better for investors to offload this responsibility to a professional manager. This allows the investor to not only have a professional do the stock picking but also to invest in a diverse basket of stocks that will provide diversification for a smoother ride as markets gyrate through market cycles.
The third lesson, never count on greater fools to bail you out of reckless risks, is a warning to investors not to fall for flashy advertising or promises of outsized returns. Invest in what you know or find someone to help you invest in a portfolio that will help you achieve your stated financial goals. The investing world is rife with new alternatives like limited partnerships for oil and gas or real estate that often cost way more than they can possibly return. Stick to investments with long track records and verifiable results.
The final lesson and the most important is your results will depend much less on how markets behave than on how you behave. Your emotional state is the most easily managed variable when looking at your investments. You cannot control where the market will head in any given amount of time. The most valuable thing you can do as an investor is buy and hold for long periods of time. Don’t try to time the markets, it is a losing game. Never sell your investments unless you need the cash to live on. Be disciplined with your investment plan and you will reap the rewards.
As financial advisors setting up an investment plan and implementing a portfolio is the easy part. Managing expectations and being a buffer with clients’ emotional decisions when the world seems to be falling apart is the challenging part. Our financial planning process and education surrounding client portfolios is what helps our clients achieve their dream retirement.
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