Investing as a concept is straightforward: invest to protect your hard-earned savings from inflation and grow your wealth.
Yet, while investing might seem simple, it's execution is far from easy.
It demands foresight and discipline—the ability to forgo immediate gratification for future gain (saying no to spending now, and yes to investing for tomorrow).
You also need to decide how much to invest, to balance your needs and goals with market realities.
This is where good financial advice counts.
Where a sage, caring professional makes all the difference.
They help you navigate the gap.
Between the simple idea and the complex reality.
Let's explore ten investing concepts that are simple to understand, but challenging to execute.
1. Delaying gratification
Investing is simple: Invest now for a better future.
But not easy: Saying no to spending today.
It takes real discipline to forgo immediate pleasures for long-term gains. That new gadget or holiday looks tempting. But your future self will thank you for investing instead.
2. Determining investment amount
Investing is simple: Invest what you can afford.
But not easy: Balancing current needs with future goals.
How much should you invest? Too little, and you might fall short of your goals. Too much, and you might struggle to meet current expenses. Getting this right is a key.
3. Understanding market structure
Investing is simple: Global markets act as a core driver of returns for an investor's portfolio, and offers broad diversification.
But not easy: Navigating the complexities of countries, sectors, and companies.
A world of investment opportunities awaits. But understanding how they all fit together? That's where things can get tricky.
4. Balancing stocks and bonds
Investing is simple: Stocks for growth, bonds for stability.
But not easy: Choosing the right mix for your risk tolerance.
High-quality bonds can act as a safety net, protecting you from economic turmoil and helping to smooth returns. But which ones are truly "defensive"? And how much stability do you need versus growth potential?
5. Portfolio construction
Investing is simple: Diversify your investments.
But not easy: Selecting the right combination of assets.
It's not just about the picking the right asset allocation. It's about how those assets work together in your portfolio. This requires a deep understanding of risk and return dynamics. It's also not easy to know what evidence to look for in order to gain an understanding about what types of long-term investments typically improve a portfolio’s structure.
6. Cost management
Investing is simple: Lower costs mean higher returns.
But not easy: Balancing cost with potential gains.
Controlling financial costs makes good sense.
A low-cost portfolio aligned with your life strategy boosts your chances of success. But it's not easy to regularly screen for which funds might be best positioned to capture the returns of each part of the market, or to understand the trade-off between the management costs of a fund and the opportunity cost (i.e. what could have been) of omitting an investment.
Remember, the financial cost of accessing your desired solution is taken away from the outcome achieved.
7. Understanding investment outcomes
Investing is simple: Take sensible risks for market returns.
But not easy: Navigating the complexities of 'alpha' and market outperformance.
Starting with taking on sensible risks, such as owning a diversified portfolio of investments (the great companies of the world), we expect a market rate of return.
Depending on how different a portfolio is to the broad market, the portfolio return will come in higher or lower than that of the market.
This is what's known in the investment industry as ‘alpha’.
To achieve a return above that of the market portfolio (a positive alpha) an investor must own a portfolio of stocks and bonds that returns higher than the corresponding market. This can be done through picking stocks, timing markets - neither of which are expected to deliver reliably positive outcomes...
Or, it can be more reliably achieved by overweighting areas of the market the academic evidence would suggest reward investors for owning them over the long term, such as tilting to value and smaller companies.
8. Behavioural management
Investing is simple: Stay rational and disciplined.
But not easy: Managing emotions in a volatile market.
Investing isn't just about numbers. It's about managing your own behaviour.
There is a cost associated with bad investing behaviour, such as falling foul to biases, illusions or acting on inadequate information. Good process and discipline, as well as having a good financial adviser for additional support, can ensure such a cost is eliminated.
9. Regular portfolio review
Investing is simple: Keep your investments on track.
But not easy: Implementing a thorough, consistent review process.
Markets change. Your life changes. Your portfolio needs to keep up. But how often should you review? And what exactly should you look for?
10. Maintaining a long-term focus
Investing is simple: Stick to your investment plan.
But not easy: Staying committed through market highs and lows.
Investing using a well thought-out, evidence-based and systematic investment process helps to reduce the emotional pressures involved and deliver investors with the highest probability of a successful investment outcome.
It doesn't guarantee the outcome will always be favourable; it simply can't, given the uncertainty of the markets.
What it does do is to help us make strong, rational decisions and to avoid the silly mistakes that prove to be so costly, so often.
In particular, chasing markets and managers in search of market-beating returns and being sucked into the latest investment fad by recent trends, plausible marketing stories and press coverage.
Bad process, or a lack of process, has an upside outcome that is down to luck rather than judgement.
Here's a simple formula to describe what you can expect from an investment outcome, and to summarise the points above:
Wise words to leave you with
Charles D. Ellis wisely wrote in his excellent book ‘Winning the Loser’s Game’ (Ellis, 2002):
"The hardest work in investing is not intellectual, it’s emotional. Being rational in an emotional environment is not easy. The hardest work is not figuring out the optimal investment policy; it’s sustaining a long-term focus at market highs or market lows and staying committed to a sound investment policy. Holding on to sound investment policy at market highs and market lows in notoriously hard and important work, particularly when Mr. Market always tries to trick you into making changes."
Simple but not easy.
A systematic process and a guiding hand from your financial life manager are the keys to success.
