THE FOUR PILLARS of successful investing
THE FOUR PILLARS of successful investing (equities)
Establishing an investment portfolio is like building a home. You have to get the foundations right from the very start. Building a quality structure, takes time and effort. It can quite literary be; blood sweat and tears.
But the effort you put in at the start pays off over the years and gives you safety, comfort and security. Much like a well planned diversified investment portfolio. However if you rush the critical foundations, build your home quickly, cut corners and not listen to sound advice from a reputable builder, you most likely will end up years later with the walls of your home caving in on you.
(you can see my love of analogies coming into play here)
The most destructive, yet unpredictable factor that threatens the stability of a home is the weather. Even in these most technically advanced days, we are still unable to accurately predict some extreme weather situations.
This was proven in recent years with a number of freak weather storms near my home town on the South coast of NSW. In a particularly bizarre act of the weather, sea twisters came off the ocean and onto the land destroying kilometres of coastlines and taking down a number of homes. More recently the devastating National fires that spread furiously and ferociously over Christmas 2019/2020. No matter where you live or how you invest we ALL still subject to acts beyond our control. We can prepare- but simply can not always predict.
And so too, a investor is a fool if she or he thinks that they can successfully predict the future of the global economy.
Whether you are a mum and dad investor, saving and investing for your children’s future, or a industry professional. No one has a crystal ball.
Like the weather a ‘black swan event’ like COVID-19 or 9.11 can be the most unpredictable and destructive threat to your investment portfolio and earnings. But with a carefully built portfolio based on solid foundations, sound strategy, and adequate risk management , you have a much better chance of weathering a financial storm.
The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles...
Quality, value, diversity and time....
All four are equally important.
Forget about just one and you are setting yourself up for a collapse.
Allow me to briefly explain why all four pillars are crucial to your investing success...
If we look at the first two pillars, quality and value, it’s obvious this means to look for assets that are expected to provide higher returns relative to their risks. Applying this to shares, quality companies should have a sound basis to their operations and growth; that is, their earnings are not driven by fads.
This however, might mean they take time to deliver. Remember that investing in the share market is generally a long-term strategy.
Quality and value don’t always go hand in hand. Quality stocks may trade at such high prices that they offer low initial value or it could be that expectations for these companies are sometimes too high.
The key here is quality... the expectation is that they will be around for a long time, not just a good time.
This takes us to diversity.
You have probably heard the saying, "don’t put all your eggs into one basket" - meaning to diversify your portfolio -and in most cases that is extremely wise. Warren Buffet famously said “ “Put all your eggs in one basket and watch the basket very carefully.” Now- I don’t mean to burst your bubble- but the average investor (including professionals and fund mangers) are most certainly not “The Oracle of Oklahoma” Warren Buffet.. To think they come close would be egotistical at best. I may be inclined to use the term “delusional” …. This aside, most families simply can’t afford to take on high levels of risk. I’m a mum, and provider myself and I totally get it! Risk doesn’t always equate to a reward, sometimes it just equates to a big fat sorry loss.
Regardless; there are better and safer strategies for me to utilise … I know I personally don’t have to be a billionaire to be completely and entirely secure and have financial freedom.
Diversity acts like the scales in a portfolio, providing balance. True diversity in a portfolio gives the investor the opportunity to take advantage of "hot stocks" or asset classes, whilst balancing out the risk with quality stocks and asset classes.
It can provide a buffer against mistakes in assessing value because nobody gets it right all of the time.
A well-balanced portfolio should be designed cope with occasional losses.
And finally, the pillar of time applies to the previous three. It can give you the best chance of success. Every market will suffer periodic downturns, however over time the upturn will always triumph. The golden rule is don’t panic and get caught up in the fear and greed cycle.
Make sure your investment portfolio is based on solid foundations.
Not ‘get rich quick schemes’ or ‘hot stocks’ mentioned by friend at the hairdresser or pub.
And if you are unsure about any investment or are confused about what path you should take- always reach out to your licensed financial professional.
Check their ABN, financial education and industry licenses. Including CRN. (Be aware of scams and con-artists)
Below is an infographic I created to sum up the key points in this article..
Infographics can be particularly helpful to visual learners and give a visual anchor to process the information.
For many visual learners like myself - it may lead to an "A-HA". moment.....