Timeless Investing Truths

Why is investing so rewarding?

Photo: Victor Hanacek. Source: Picjumbo

Investing is fascinating. It’s not just the financial returns, significant as those may be. But investing is valuable in its own right. The profession is intellectually demanding, the competition is consistently stimulating, and the relationships with clients and colleagues are priceless. Here are some timeless truths about investing that have impressed me over the three decades I’ve been investing and the ten years I’ve been writing about it.

First, be humble. You don’t know what you don’t know. Socrates, Confucius, and Solomon noted that confessing your own ignorance is the beginning of any true wisdom.

Second, be patient. Time is on your side. Albert Einstein noted that compound interest is the eighth wonder of the world. Those who understand it earns it, those who don’t, pay it.

A corollary rule is to borrow sparingly. Leverage can multiply your returns, but it can also wipe you out. If you put $10,000 in the market in 1970 you would have almost a million dollars. If you invested $20,000 – with half of it borrowed – you would have been wiped out.

Pay attention to taxes. It’s not what you earn, it’s what you keep.

Keep the big picture in mind. Asset allocation is the dominant driver of returns. Since 1970 stocks have returned over 10% per year. Bonds have earned 7%. Cash has yielded 5%. And not investing gets you nothing. So get started. A journey of a thousand miles begins with a single step.

A related rule is to diversify. While bonds and cash may drag on returns, they add stability to a portfolio. If their security allows you to sleep at night and stay the course through the ups and downs of the stock market, they’ve earned their keep.

Finally, be generous. The time is always right to do the right thing. This will help you to keep money in its place. Wise people have money in their heads, not their hearts. The surest way I know to keep money from taking hold of my soul is to give it away.

These are just some of the lessons I’ve gained through the booms and busts, the crashes and melt-ups, the history and finance and human nature we’ve seen the markets bring out. There’s always something to learn. That’s the biggest lesson of all.

Douglas R. Tengdin, CFA

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