It’s all too easy to lose focus on what’s important in the craziness of daily life. Unfortunately, this negligence frequently causes many investors to deliver underwhelming results or, in the worst situations, suffer significant losses.
I’ve compiled a few illustrations from author, investor, and financial educator Brian Feroldi that teach straightforward yet crucial concepts that every investor should constantly keep in mind. I’d want to go through five of his investing philosophy’s most notable teachings today:
What Truly Drives Markets
Earnings and dividends are the only two real factors that affect how well our markets function, according to John Bogle. Speculative variables like values expressed by measures like the P/E ratio also come into play, primarily in the near term.
Focus on the Controllable
Regrettably, some investors continue to base their whole investment plans and way of life on forecasts about when the Fed could lower interest rates—projections that have changed 10 times over the last nine months. Really?
What is genuinely under your control? Definitely not inflation, interest rates, or the markets themselves. Your capacity for monthly saving, the part allotted to investments, your asset allocation, rebalancing, and accumulation objectives are all things you may manage.
All of these factors are under your control. Turn your attention away from things that are beyond of your control and towards what is actually important.
Invest with Favorable Odds
Since the beginning of stock markets, buying a straightforward ETF that tracks the S&P 500 index and holding it for at least 17 years has consistently produced positive returns through pandemics, wars, financial crises, and banks collapses.
Time is your friend, assuming you have enough of it, as can be seen in the image above. You could object, “But 17 years is too long!” (though perhaps not considering modern life expectancy).
However, the very minimum should be an investment horizon of at least 8–10 years. The fact that Warren Buffett, the greatest investor of all time, has held onto stocks for over 20 years (he owned Coca-Cola Co. for 34 years) is not a coincidence.
Invest in Businesses, Not Stocks
I hate to keep bringing up Buffett, but he continually gets things right. You don’t purchase a piece of paper in the hopes that its value would increase.
You are purchasing a business that regularly manufactures and sells things or services and is made up of employees, facilities, services, patents, and customers. Additionally, this company creates both present and future cash flows.
Therefore, you’re making an investment in a company that produces cash flows, hopefully at a favourable price. This knowledge enhances your first assessments while choosing certain stocks.
The price of a stock might change a lot, especially in the near term, but if you understand the firm and it keeps expanding, your outcomes will eventually be favourable.
Short-Term Risks ≠ Long-Term Risks (and Vice Versa)
It is safer to purchase government bonds than hazardous stocks. Are you certain in every way?
Maybe it’s time to briefly rethink what danger is.
What risk is not over time: swings between highs and lows. Risks include not meeting your financial objectives and not exceeding inflation.
When seen in this light, equities are the only asset class capable of producing substantial returns over medium to long periods in addition to covering inflation.
We could list a hundred more lessons along these lines, but understanding these first five will put you one step closer to success in an ostensibly straightforward but nonetheless poorly understood environment.