This year has started off with a lot of turmoil. The US has unprecedented inflation, the world is still recovering from the Covid pandemic and then Russia invaded Ukraine to create even more volatility. With so much negative news coming to our attention, it is easy to forget about things that can go right. These are principles investors can use to help them to focus on staying on the right track, even during tumultuous times.
Principle #1 – control what you can, and avoid what you cannot
It is unwise to try to control things you cannot influence but equally unwise to not exercise control over the things we should. The only person who can control you is you. Negative thoughts can lead to fear, which will impact your decisions adversely. Positive thoughts on the other hand will help you to see opportunities and help you think clearly. You cannot control other people, therefore markets cannot be controlled. This is a fundamental belief that every investor should embrace.
Principle # 2 – understand how markets operate
In the short-term stock markets tend to act like a “voting machine” – meaning people vote with their emotions. Voters get influenced by fear or greed, which usually goes into overdrive and drives markets up or down to extreme levels. In the long-run stock markets tend to behave like a “weighing machine” – they weigh company profits and reward them by being willing to pay a higher share price when they see companies continue to deliver profits, grow and expand.
Principle # 3 – you will reap what you sow
Consider your investment to be one of your friendships, just because your friend goes through a tough time does not mean you need to cut the friendship. If you “stick it out” during difficult times your loyalty and determination will be rewarded in the long term, as you will reap the benefit of this friendship (restored growth and dividends) when the tough time is over. Life and investments are not only rosy, but we also need to be willing to work through the storms.
Principle # 4 – choose your friends and input carefully
One of the things I can choose is my inner circle of friends and input. Practically this means what I read and who I talk to. Some newspapers tend to only focus on the negative and sensation – these I avoid. There are some trusted information sources that provide the facts, but also a healthy context. Find something that works for you. This is especially important if you like to stay informed, but not overwhelmed with the negative news flow.
Principle #5 – understand your goals
I firmly believe people are more important than their money. Practically that means I can use money to serve my needs. If you determine what you want your money to do for you there is a goal that can be met. It gives me ambition and satisfaction to work towards a predetermined goal. This goal can be to provide for your own retirement or grow a legacy for your children and grandchildren. Once the goal is met, the job is done.
Principle #6 – have realistic goals
If you need 25% growth to fund your retirement needs, it is highly possible that this growth will not be achievable. If you have a realistic target, you can comfortably work towards it without feeling the pressure to perform. Markets will go up and down in certain years, so you should expect some underperformance along the way. Live within your means and work some margin into your planning, this will prevent anxiety. The principle is to plan with a healthy margin of safety.
Principle #7 – investing is more than just money
Successful choices will benefit those around you. Your children will be given a foundation to be launched from. Your family will enjoy financial security. You will be able to spend money on your dreams and enjoy them. But one of the things I recently learned is that the journey toward your goal also matters. If I am fearful about my investments, I tend to be grumpy and agitated towards friends and family – and nobody likes this. If I am happy whilst pursuing my goals it creates a blueprint for others to follow, creating a legacy of healthy financial stewardship that can last for generations after I am gone.
Everybody can be successful and happy. I realised that money and investment are one of the tools that I can use to achieve my own goals. When the going gets tough I fall back on my principles, learn from others that have gone before me and focus on things within my control. It is in the difficult times that we get tested and can grow a lot, seeds to be sown that will reap rewards when the tide (and markets) eventually turn in our favour again.