Shield yourself against inferior investments

Don’t just take our word for it! Dr Benjamin Holdsworth sets out the key tenets of successful investing.

A systematic approach to investing provides the best chance of experiencing a successful investing journey. 

Sticking to some key guiding principles – which are grounded in evidence and logic – gives investors a solid foundation on which to build a sensible investment solution. 

Although we repeat this doctrine often, there is no need to simply take our word for it. 

Here below we provide an insight into five of our favourite quotes from experienced and accomplished academics and practitioners and explain how these link to our own investment philosophy. 

1 A focus on risk management, rather than chasing performance

‘You don’t find out who’s been swimming naked until the tide goes out.’

Warren Buffet, Berkshire Hathaway 1994 Annual Meeting

The financial media enjoys reporting on top-performing fund managers. Humans like exciting stories. Good investing, however, should – to most – seem relatively boring through taking a ‘risk-first’ approach. 

Ultimately, sensibly considered risks should be rewarded appropriately over time. The risk management process involves deciding which risks one wants to be exposed to in portfolios – such as broad global equity market risk – and which we do not,such as the use of leverage. 

Managing these risks tightly over time and monitoring them on a regular basis is key.

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2Be diligent and act rationally, with due patience

‘Activity in investing is almost always in surplus.’

Charles D. Ellis, Winning the Losers Game, 1993

Ensuring any decision made is free from an emotional reaction is a must. 

Many investors are prone to making knee-jerk – and sometimes permanently damaging – investment decisions. Taking steps to avoid this is well-advised.

3Take part and believe in capital markets

‘You’ve got to talk yourself out of the market portfolio.’

Eugene Fama, Nobel Laureate, speaking with The Rational Reminder Podcast, May 2020

Owning a share of companies through investing in capital markets is an effective way for investors to grow their wealth over time. 

Owning a little bit of everything is not a bad place to start. Luckily for investors these days, one can do so with relative ease through investing in mutual funds. 

Doing so enables investors to participate in the growth of listed companies from around the world in a diversified manner, avoiding being overly concentrated in a single stock.

4Keep costs low

‘In investing, you get what you don’t pay for.’

John C. Bogle, Founder of The Vanguard Group, February 2005

Cost is by no means the only factor separating better and worse investment solutions, but it is a significant one. 

Costs can be implicit – for example, trading costs – or explicit – for example, fund manager fees. Clearly, any saving made by an investor is retained in the portfolio, rather than being passed off to another party in the process.

5Stick to the plan

‘Real-world application of fundamental investment principles produces superior outcomes.’

David F. Swensen, author and former chief information officer of Yale University Endowment, 2005

An investor who can recall their key investment principles stands in good stead to avoid making mistakes. 

Abiding by some simple guidelines – such as those outlined by the investment experts in this note – enables investors to employ a robust and repeatable process for managing their wealth.

Dr Benjamin Holds­worth (right) is a director of Caven­dish Medical, specialist financial planners helping consultants in private practice and the NHS 

The content of this article is for inform­ation only and must not be considered as financial advice. Cavendish Medical always recommends that you seek independent financial advice before making any financial decisions. Levels, bases of and reliefs from taxation may be subject to change and their value depends on the individual circumstances of the investor. The value of investments and the income from them can fluctuate and investors may get back less than the amount invested.