When someone decides to start investing their money, they inevitably encounter a whole “ocean” of incomprehensible terms and complex technical nuances.
Ultimately, he is forced to accept the advertising of financial companies, many of which turn out to be not who they say they are.
John Bogle, the founder of the Vanguard group, is widely known for being able to “transform” the overly complex investment process into a simple algorithm of actions that even “green” beginners can understand.
But John Bogle is best known for formulating the so-called “index investing strategy.”
It was she who won the wallets and investment accounts of not only the broad masses of private investors, but also huge “money bags”, incl. pension funds.
Today, the index fund industry is confidently taking away an ever-increasing “piece of the pie” from leading investment houses and insurance companies, making the very idea of fiduciary money management meaningless and obsolete.
In this article, I will talk about 5 fundamental principles of investing money that any novice investor can safely follow.
These principles were formulated by me based on a reinterpretation of John S. Bogle’s “12 Pillars of Wisdom.”
So, meet John Bogle’s 5 Principles of Investment — here’s what you need to become an investor:
Principle No. 1. Investing is not as difficult as it seems
Successful investing involves (1) doing the “right” steps and (2) avoiding the biggest mistakes.
For an investor it will be “correct”:
Focus all your attention on an asset allocation that will logically follow from his current financial situation, his goals, risk appetite/tolerance, etc. key factors.
For an investor it will be “wrong”:
Investing in individual industries or stocks of individual issuers, as well as any attempt to speculate short-term and use complex financial products — in order to seek the highest yield.
Principle No. 2. Give your investment all the time you can afford.
The longer your money “works” (invested in the “right” assets), the more significant results you will get.
At the same time, try your best to avoid short-term investment horizons, because… financial markets are subject to high volatility.
In other words, a collapse can happen at any moment — and you will find yourself in a huge “paper” minus.
Always remember the fact that over the past 100 years, the US stock index has grown by an average of 11% per year.
Undoubtedly, huge “drawdowns” associated with wars, economic and geopolitical crises periodically occurred.
You should learn to take smart risks when buying stocks for the long term.
For “he who has not risked anything has gained nothing.”
Principle No. 3. Diversification
What does it mean to distribute risks into “different baskets” = assets.
Thus, you sharply reduce the volatility (i.e. fluctuations in value) of your investment portfolio.
The most obvious way is to buy the entire stock market in bulk, rather than trying to pick the best stocks from individual issuers.
IMPORTANT: Your portfolio should have a reasonable representation of currencies, domestic and US index funds, rental properties and other assets.
Principle No. 4. Don’t overestimate your ability to select future “champions”
No matter how carefully you analyze the past (market trends, issuer financial statements, news, etc.), you will not be able to accurately predict the future.
The fact is that stock markets fluctuate every trading day, because high and unpredictable volatility is their innate property.
Therefore, it will be much easier to buy the entire market — through the purchase of index funds — with the goal of achieving returns in line with the growth of the entire market (which itself is the benchmark for all investment bankers).
Yes, experienced analysts can, with a high degree of probability, “predict” what will happen in the market.
But with one small caveat — they themselves do not know when exactly this will happen (that is, when exactly their predictions will come true).
I immediately remember the old joke:
“Even a broken clock shows the right time twice a day.”
Principle No. 5. Always think long term
Don’t let the everyday information noise, no matter how loud, lead you astray.
Then you won’t have to worry about (bad) short-term news.
Emotions are our enemy!
And patience and consistency are our best “friends” and, perhaps, the most valuable personal “assets” for every long-term investor.
