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The Principles of Sound Investing - Part 1

The Principles of Sound Investing - Part 1

| April 04, 2024

OK, confession time—I talked about things backward in last month's blogs—I did it on purpose, though! Typically, I talk about the principles and practices of sound investing in that order. Last month, I spoke of the practices, the action steps, of sound investing: asset allocation, diversification, and rebalancing. This month, I’ll talk about sound investing principles, which is the emotional toughness needed to become and benefit from long-term investing. So, let’s get started with an overview. 

As a financial advisor and author who has written extensively on investing principles, my approach is grounded in long-term, strategic thinking. I often emphasize the psychological aspects of investing as much as financial ones. Some of the fundamental principles I talk about are:

Long-term perspective: I cannot stress enough the importance of focusing on long-term goals and not being swayed by short-term market fluctuations. Successful investing requires patience and discipline, two of the three principles I will dive deep on in this month’s blog series.

Asset allocation: As you know from last month’s discussion, I believe in the importance of diversification and strategic asset allocation based on individual risk tolerance, investment goals, and time horizons. In fact, asset allocation and diversification are two of the critical practices of sound investing that we discussed. 

Quality investments: I also recommend investing in high-quality, fundamentally sound companies or assets with solid track records of performance and stability. And I believe in the power of compounding returns over time.

Avoid market timing: One of my mantras is the wise phrase Warren Buffet is known for, “It’s about time in the market, not timing the market.” Because of this, I discourage clients from trying to time the market, as it is notoriously difficult to predict short-term movements. Instead, I encourage investors to stay invested through market ups and downs, focusing on their long-term investment strategies.

Regular investing: Adopting a disciplined approach to investing, like dollar-cost averaging, where investors regularly invest fixed amounts of money over time, regardless of market conditions, is one way to regularly invest. This helps mitigate the impact of market volatility and can lead to better long-term returns.

Emotional discipline: And this is the big one folks, what we will focus on in the parts this month through faith, patience, and discipline. Creating and maintaining emotional discipline. The role of emotions in investing can never be understated. I teach my clients to remain disciplined and avoid making impulsive decisions driven by fear or greed. The foundation of this is sticking to a well-thought-out investment plan even during turbulent times in the market.

These principles aim to help investors build and maintain wealth over the long term while navigating the complexities of the financial markets with prudence and confidence.

Until next time…

One last thought: We believe an educated investor is an empowered investor. If you like what you’ve read and think your friends and family can benefit as well, please share.

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested in directly. 

All investing involves risk, including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.

Dollar-cost averaging involves continuous investment in securities regardless of fluctuation in the price levels of such securities. An investor should consider their ability to continue purchasing through fluctuating price levels. Such a plan does not assure a profit and does not protect against loss in declining markets.