By ROBIN POWELL
Investing isn’t easy, but nor is it particularly complicated (or at least it shouldn’t be). To quote William Bernstein in The Four Pillars of Investing, the body of knowledge that the individual investor, or even the professional, needs to master is pitifully small.”
That’s why, when Ben Carlson and I wrote Invest Your Way to Financial Freedom, we deliberately made it short enough to read in a single sitting.
But can investing be simplified even more than that? Well, I’ve given it a go, and here’s the result — 50 laws of investing.
They’re in no particular order, and it’s not an exhaustive list. But if you invest with these basic laws in mind, you won’t go too far wrong.
1. Forecasts are almost invariably inaccurate and best ignored.
2. The biggest mistake is not learning the habit of regularly putting money away.
3. The fund industry is not your friend; its best interests and yours are fundamentally misaligned.
4. The best strategy is the one you can stick with through thick and thin.
5. Consistently identifying, in advance, the best-performing funds is almost impossible.
6. Most of what happens in the markets in the short term is random noise.
7. Luck and skill, in others and ourselves, are easily confused.
8. Most of what passes as investor education in the media is really sales and marketing.
9. Diversification affords the best protection against our inability to predict the future.
10. Compounding cuts both ways: costs compound as well as returns.
11. You either learn to control your emotions or allow your emotions to control you.
12. We attach less importance than we should to evidence that contradicts our beliefs.
13. People prefer a pundit who is confident to one who is accurate, and pundits are happy to oblige.
14. However much, or little, you have to invest, the best place for it is a low-cost index fund.
15. The most important attribute of all is emotional discipline.
16. The only certainty is uncertainty and you should expect the unexpected.
17. The longer you invest for, the better your chances of success.
18. How much experience a fund manager has tells us little: some lag the market their whole career.
19. Saving is a bigger priority than investing: you shouldn’t invest until you’ve saved.
20. The only factors worth focusing on are those you have a degree of control over.
21. However ready you feel for your first bear market, it will still be very scary when it comes.
22. No one can predict short-term movements in the stock market.
23. There is no reward without risk; if it seems too good to be true, it probably is.
24. Instead of trying to to beat the market, it’s better to focus on not being beaten by it.
25. Most investors, and even many professionals, don’t actually know how they perform.
26. The iron rule of financial markets and fund performance is reversion to the mean.
27. Actively managed funds perform little or no better in bear markets than in bull markets.
28. It’s very hard to understand something if you’re paid a small fortune not to understand it.
29. If you aren’t humble, the markets will eventually find a way to humble you.
30. Every time is different; nobody knows how any given situation will unfold.
31. The less you to pay to invest, the more you keep for yourself.
32. It is easier to recognise failings and biases in others than in ourselves.
33. That the average indexer will outperform the average active investor is a mathematical fact.
34. A knowledge of psychology and history is of more use than expertise in economics.
35. Saying you’ll buy when prices have fallen is easier than actually doing it.
36. Pain is inevitable and your success depends on your ability to endure it.
37. Market bubbles seem obvious in hindsight but are very much less so in real time.
38. The biggest risk most investors face is running out of money before they die.
39. The industry sells complexity, but simple solutions are almost always better for consumers.
40. More money is lost anticipating market crashes than in actual crashes themselves.
41. The best results are achieved by those who know what they don’t know.
42. There is very little correlation between the stock market and what’s going on in the economy.
43. Investors have a bias towards action but the best course is usually to do nothing.
44. History doesn’t crawl, it leaps: world-changing events can happen overnight.
45. The media needs something new to say; everything you need to know has been said already.
46. The most boring assets can make the best investments, the most exciting the worst.
47. The longer you invest for, the more successful you are likely to be.
48. Performance comes, performance goes; but fees never falter.
49. The fact that trends and cycles exist doesn’t make them easy to predict or navigate.
50. Though it’s billed as “settling for average”, indexing is a way of ensuring above-average net returns.
ROBIN POWELL is the editor of The Evidence-Based Investor. He works as a journalist and consultant specialising in finance and investing, and as a campaigner for a fairer, more transparent asset management industry. You can find him here on LinkedIn and Twitter.
ALSO BY ROBIN POWELL
Market efficiency is nothing new
Helping a “lost” generation to invest
Are we living in the 1970s all over again?
Learning to say no is key to a fulfilling life
A good job requires more than a good salary
Why do councils waste so much money on pensions?
FIND AN ADVISER
The evidence is clear that you are far more likely to achieve your financial goals if you use an adviser and have a financial plan.
That’s why we offer a service called Find an Adviser.
Wherever they are in the world, we will put TEBI readers in contact with an adviser in their area (or at least in their country) whom we know personally, who shares our evidence-based investment philosophy and who we feel is best able to help them. If we don’t know of anyone suitable we will say.
We’re charging advisers a small fee for each successful referral, which will help to fund future content.
Need help? Click here.
Picture: Kendall Scott via Unsplash
© The Evidence-Based Investor MMXXI
