The best investors ignore the conventional Wall Street blabber about stock-picking, market-timing, and beating-the-market. They know investing is not a game. The returns you seek are actually there for the taking. You just need a disciplined approach and a long-term view. Investing is about getting your fair share of the capital market returns, proportionate to the risk you decide to take. Be simple, strategic, and process-oriented. Focus on the controllable and reliable variables; and most importantly, your own behavior as an investor.
Do you have an investment portfolio or an investment collection? You should have a top-down strategy expressed as a certain target percentage for equity exposure and an allocation plan using a small number of distinctive asset classes and styles.
Do you manage your portfolio’s tax profile? You should deliberately locate certain assets among your taxable and retirement accounts, avoid short-term gains, and harvest tax losses whenever they appear. Managing tax attributes is a particularly reliable way to add value and, oddly, still a well-kept secret.
Do you use index funds for basic exposure to each asset class? You should have a great deal of skepticism about active management. If you are mindful of manager risk, tax burdens, expense ratios, and the sales culture, then the benefits of indexing become crystal clear.
Do you pay extra-close attention to costs? Costs are entirely controllable and unlike most other things we buy, higher cost for investment products does not mean higher quality. Quite the opposite is true.
Do you follow a structured process of monitoring exposures and rebalancing back to your targets at some predetermined intervals? Reversion to the mean is the single most reliable function of the investment world. Rebalancing takes advantage of this, forcing a buy-low, sell-high discipline and trumping the emotions that argue for the opposite.
Finally and most importantly, do you recognize the potential self-harm you can do by your own behavior? Humans are simply not pre-wired to be good long-term investors. We misjudge opportunity and risk in both good times and bad. We’re vulnerable to sales pitches and crowd-following. The reliable solution is to follow these concepts and to believe that it is the investor that matters much more than the investments.