Few simple investing rules are good for your portfolio:
- Don’t risk more than you can afford to lose. If you are a conservative person who likes to avoid risk in every day life, then it probably doesn’t make sense to get into very aggressive investments.
- Understanding your time frame will also help determine your risk tolerance. If it’s too good to be true, then it probably is. On the flip side, you should be at least opening your quarterly statements and reviewing your accounts on a semi-regular basis.
- Don’t let your emotions get the best of you.
- It’s a mistake to think that there’s no value in learning. It’s generally smart not to believe that you can outsmart all of your fellow investors. Humility goes a long way in investing. Some investors run far too far with this thought, however. It’s a terrible mistake not to respect expertise.
- Following an approach that you do not fully understand may cause you to ignore warning bells. You don’t need to read every academic paper published in the field. You need to know enough about the theory to understand both its strengths and weaknesses and to make an informed call as to whether adjustments to the conventional indexing strategies are needed in your case.
- It will work out in the long run. Indexers are told not to worry about price drops because indexing is intended as an investing approach for the long run and in the long run stocks can be counted on to do well. There’s a good bit of truth in that claim. The historical stock-return data indicates that stocks are likely to provide a good return in 30 years.
- Indexing permits you to enjoy a share of the productivity generated by U.S. businesses. On first impression, indexing might seem suspect. How could so simple an investing approach generate such handsome returns? Shouldn’t handsome returns go only to those taking on significant risks?
You don’t need to choose between adopting an overhaul of your investment plan every six months and putting things entirely on autopilot. The sensible middle-ground is to be reluctant to make big changes in your plan. But do be open to learning experiences. When you learn something new, of course you should make whatever changes in your plan are needed to reflect your new understanding of what works. Remember what works, works is what we want to pursue.
Happy kaizen investing!