When it comes to investing, it’s often the case where people are on the lookout for that one trick or one tool that can help guarantee success in the future. Unfortunately, there’s no such thing as the Holy Grail for investing. That said, there are a few simple and sound actions that anyone can take to help better their odds of success. 1) Start saving and investing as early as possible There are two important benefits to stepping into the investing world early. Firstly, you are able to take as much advantage as possible of compound interest, a force which…
When it comes to investing, it’s often the case where people are on the lookout for that one trick or one tool that can help guarantee success in the future.
Unfortunately, there’s no such thing as the Holy Grail for investing. That said, there are a few simple and sound actions that anyone can take to help better their odds of success.
1) Start saving and investing as early as possible
There are two important benefits to stepping into the investing world early.
Firstly, you are able to take as much advantage as possible of compound interest, a force which Albert Einstein reportedly called “the greatest mathematical discovery of all time.” To illustrate the power of compound interest, I’d need your help to answer a simple question: How much do you think you will receive if you can double a single cent for each day over a month (31 days)?
$1,000?$ 100,000? How about a $1 million? Well, all three figures are way too low. Turns out, if you could double your money every day for 31 days, you’d end up with a whopping $10.7 million even if you had started with just 1 cent!
Of course, it’s only in fantasy-land where someone can double their money every day, but this example is a powerful way to drive home the message that when time is combined with compound interest, great things can happen.
Another crucial benefit of getting into the game as early as you can is so that you can learn from your mistakes. In addition, the more time you’ve spent in the market, the more chances there are for you to learn more about how you’d react in different kinds of market conditions. You can then put in place safeguards to prevent yourself from making the same silly mistakes in the future.
2) Focus on real returns
Be it stock market investments or any other kind of financial instruments, one should think of real returns, or what’s otherwise known as inflation-adjusted returns. To use an extreme example, it’s no use earning 20% annual returns if the rate of inflation’s running at 25%; you’re actually losing spending power each year!
And since we’re talking about returns, it’s good to also keep track of all your investing-related costs. This might not seem important, but if you’re spending a few thousand dollars a year on newsletters or expensive advisory fees, that’s a few thousand dollars less for you to compound each year.
3) Diversify your investments
It is never advisable to put all your hard-earned money into a single stock no matter how well you have done your research on the underlying business. To that point, here’s a funny story from investor Howard Marks on the unknown risks that can destroy us if we’re too concentrated (emphasis mine):
“[There was a] habitual gambler who finally found a sure thing: a race with only one horse. He bet all his money, but halfway around the track the horse jumped over the fence and ran away.”
Diversification allows you to spread your risks by lowering the odds that all of your investments will lose all at once. While your returns may be subdued as compared to betting big and getting it right on one hot stock, being diversified is generally a safer way to grow your money over a long period of time.
That said, it’s important to note that there can also be cases of over-diversification. So, how much is too much? There are many schools of thought behind the topic, but some research (like the ones investor James Montier presented in his book Value Investing: Tools and Techniques for Intelligent Investment) has shown that holding 30 to 40 different shares in a portfolio will be enough to eliminate nearly all company-specific risks.
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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 James Yeo doesn’t own shares in any companies mentioned.