4 Pillars of Successful Investing

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What are the 4 pillars of successful investing?

 

Establishing an investment portfolio can be likened to building a home. The most destructive, yet unpredictable element to the structure of a home is the weather. Thus the most crucial aspect of building a home are the foundations. The foundations are what the building needs to withstand diverse conditions over many years.

 

Investors need to appreciate that the current environment is temporary and simply part of an ongoing cycle. Trying to predict movements in market and in the economy is fraught with danger. Like the weather it is the most unpredictable and most destructive threat to your investment earnings. But with a carefully built portfolio based on sound foundations, you have a much better chance of weathering any financial storm.

 

Investment principles

 

The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles:

 

  • Quality
  • Value
  • Diversity
  • Time

 

We are probably all tiring of the old line, “don’t put all your eggs into one basket” – meaning to diversify your portfolio – but that is only one pillar on which to rely. The other three are equally important.

 

Let us briefly explain why all four pillars are crucial to your investing success…

 

If we look at the first two pillars, quality and value, this means to look for assets that have demonstrated an ability to produce profits over a number of years and are fairly priced. Applying this to shares, quality companies will have a reliability to their operations and growth; that is, their earnings are not driven by the latest hot thing. This however, might mean they take time to deliver.

 

Always remember that investing in the share markets is a long-term strategy.

 

Quality and value don’t always go hand in hand. Quality stocks may trade at such high prices that they offer low initial value or it could be that expectations for these companies are sometimes too high. Beware the market darling trading on a high PE ratio. The key here is quality… the expectation is that they will be around for a long time, not just for the good times.

 

This takes us back to diversity or asset allocation. Diversity acts like the scales in a portfolio, providing balance. True diversity in a portfolio gives the investor the opportunity to have consistent performance in different conditions. Some parts of the portfolio will outperform whilst other sectors are going through a tough time. It provides a buffer against mistakes in assessing value because nobody gets it right all of the time. A well-balanced portfolio can cope with occasional losses.

 

And finally, one of the most important pillars is time because it applies to all three, giving you the best chance of success. If you have a certain need within a couple of years then the place to invest is cash. If you have a longer time frame you should consider, some investing in growth assets i.e. shares or property. Every market will suffer periodic downturns, however over time the upturn will always triumph. The golden rule is don’t panic and refrain from getting caught up in the fear and greed cycle. Be fearful when others are greedy ,and be greedy when others are being fearful.

 

Disclaimer:

This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.

 

Related Post: Dollar Cost Averaging – A sound investment strategy to help you stay invested for the long term.

 

 

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If you would like to discuss your Investment Planning needs:

 

Mark

About the Author:

I am the Chairman of Prime's Investment Committee, and as a financial adviser I enjoy helping clients achieve their retirement goals and lifestyle objectives, including ensuring diversity of investments. I have a strong knowledge of Self Managed Super Funds (SMSFs).