Lessons learnt - often the hard way
Important: A summary of what a number of experts with many years experience helping people manage their investments have to say about the lessons they've learnt.
Unfortunately, many of us learn the principles of sound saving and investment practices the hard way through trial and error. And often these lessons are finally learnt, if ever, by the time we are in the countdown to retirement.
Just imagine the possible state of your investment portfolio if you had understood and followed these principles – which can be disarmingly simple – at the beginning of your working and earning life. If only you could make up for any lost years of investment opportunities.
Online investment newsletter Cuffelinks asked 37 well-known investment and economic specialists to briefly answer this question: "What investment insights would you give your 20-year-old self if you could go back in time?" Their responses – with a 200-word limit really focussing their thinking – are published in the newsletter's 200th issue.
While their insights certainly vary in places, some clear principles and themes emerge from the contributions that should help point today's youngest investors, along with numerous older ones, in the right direction. These include:
Keep to a budget: This should enable you to save and invest more. Smart budgeting includes keeping your credit card under control; maybe a tough ask for any free-spending millennial.
Make the most of the "magic" of compounding returns: Compounding occurs when investors earn investment returns on past investment returns as well as on their original capital. And the compounding returns can really mount (or compound) over the long term – compounding needs plenty of time to release its awesome power. So, compounding is highly rewarding for young investors with decades of investing ahead.
Start saving and investing as early as possible: This is closely linked to the previously point on compounding returns. Making salary-sacrificed contributions each month is an excellent way to start.
Understand the relationship between risk and return: The higher the potential returns, the higher the potential risk. Manage risk in accordance with your risk tolerance. (See the related points below on portfolio asset allocation and diversification.)
Hold an appropriately diversified portfolio: A typically-diversified portfolio with exposure to at least the main asset classes of equities, fixed interest, property and cash spreads your risks and your opportunities for returns.
Set an appropriate strategic or target asset allocation: Setting and adhering to a strategic asset allocation provides your investing with an anchor that is focused on meeting your long-term goals. Repeated research has found that a broadly diversified portfolio's strategic asset allocation is by far the primary driver of its variations in returns over time.
Don't overlook that investment markets always move in cycles: There will be plenty of rises and falls in asset values during your investing life; and a basic principle for investment success is to look through inevitable market turbulence along the way to meeting your long-term goals. And regularly undertake a counter-cyclical rebalancing of your portfolio back to its target or strategic asset allocation.
Control wealth-destroying behavioural traits: These include panicking when markets are falling and being greedy when markets are rising, making emotionally-driven investment decisions, dwelling excessively on past losses, and over-reacting to prevailing investment and economic conditions. And then there's over-confidence in your ability to consistently beat the market.
Avoid chasing the investment herd: Following the investment herd typically results in selling when prices are sharply falling and buying when prices are sharply rising. This goes back to being a disciplined investor, keeping your undesirable behavioural biases in check and investing for the long term.
Block out distracting market "noise": Again, focus on your long-term goals, adhering to your strategic or target asset allocation. And an appreciation of the rewards of compounding returns is an excellent way to turn down the distractions of market noise.
Don't pay excessive funds management fees: The handicap of high annual fees keeps compounding over time to erode the benefits of compounding returns.
Other valuable tips from these specialists include: don't invest in anything you can't understand, take professional advice, remember that blue chips come and go – underlining why you should have a diversified portfolio, and never overlook that gearing works two ways – magnifying both gains and losses.
Perhaps most of these investment pointers can be summarised in a few words: Concentrate on what you can control to your advantage without being distracted by what you can't control.
Robin Bowerman Head of Market Strategy and Communications at Vanguard.
12 May 2017