Investing Advice for the New Year

At the Motley Fool, we believe that we have the World’s Greatest Investing Community. The beauty of learning as a community is that everyone benefits from each other’s point of view and investing experiences. Every now and then, there are shared learnings from community members which are worth passing on.

Last week, one community member, cabincruiser, shared his own Foolish investing resolutions for 2015 in our community boards. Of the 10 resolutions shared, there were four in particular I’d like to pass on today. These resolutions are timely, and worth considering for the year ahead.

Without further ado, here they are:

1. “I won’t take more risk than I have the ability, willingness or need to take.”

Every person has different financial goals in life. Different people would be investing during different stages of life too. For the retiree who has amassed sufficient retirement funds, beating the inflation rate may be enough. For younger folks starting out, they may instead aim to beat the SPDR STI ETF (SGX: ES3) – a proxy for the Straits Times Index (SGX: ^STI).

Either way, the risk taken, as our community member cabincruiser notes, should be kept in check with your own financial goals. Meanwhile, you should also invest within your own circle of competence.

2. “I will avoid all complex investments and won’t invest in something if I don’t fully understand its risks.”

It is worth repeating Warren Buffett’s apt comparison between businesses and the Olympics here:

“But the interesting thing about business, it’s not like the Olympics. In the Olympics, you know, if you do some dive off the— on a high board and have four or five twists— on the way down, and you go in the water a little bad, there’s a degree of difficulty factor. So you’ll get more points than some guy that just does a little headfirst dive in perfectly.

So degree of difficulty counts in the Olympics. It doesn’t count in business. Now, you don’t get any extra points for the fact that something’s very hard to do. So you might as well just step over one-foot bars instead of trying to jump over seven-foot bars.”

Investing can be kept as simple as possible. Attempting a more difficult idea might not mean that you would gain more returns from it. Risk is also personal, as each individual would have differing levels of knowledge on different industries or businesses.

3. “I won’t confuse strategy with outcome. If my plan doesn’t return what I expected, that doesn’t mean my strategy was wrong. Sometimes you win; sometimes you lose.”

Investing can be seen as a game of chance where you try to tilt the odds to your favor. As it is a game of probabilities, this also means that not everything is within your control and not every investing outcome will go your way. As such, it is important to keep your feet on the ground, and find out if your investing results were due to a good strategy, or just dumb luck.

My fellow Fool Ser Jing once shared the reference table below. This table helps you put your investing outcomes into perspective, and helps you focus on improving your investing process.

Good Outcome Bad Outcome
Good Process Deserved Success Bad Break
Bad Process Dumb Luck Poetic Justice

4. “I won’t treat the unlikely as impossible, nor the likely as certain.”

If the recent oil price plunge taught us something, it is this: The vast majority of people did not see it coming at all. In fact, even the economists around the world had a hard time predicting something like this would happen. Have a look below at the forecasts made by economists around the world last year regarding the price of oil (hint: it turns out that everyone was off target).

All this reminds us that sometimes the unlikely is not impossible. Instead, portfolio diversification could be one way to keep ourselves out of harms way.

Keep on learning. Fool on!

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.