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Robin Powell: There are thousands of books in print about investing. And there’s a deluge of information about it on the internet. But how do you distil everything that there is to know into three key concepts? We asked Professor Elroy Dimson from Cambridge University to do just that.
His first principle is diversification.
Elroy Dimson: Diversification is one of the lynchpins of investment. It’s essentially the one free lunch that you get when you’re an investor. The riskiness of a portfolio which is spread across different stocks, different industries, different stock markets, different asset classes… that risk is lower because, when one particular part of your investment portfolio does badly, another one won’t be doing badly. So, what history shows is that diversification will aid your portfolio by reducing risk.
Robin Powell: So, make sure that you spread your risk by diversifying.
Professor Dimson’s second principle is to control how much you pay.
Elroy Dimson: Costs may look fairly modest in the short-term, but they accumulate to the point at which — by the time a retirement strategy matures or saving for a particular objective comes into play — then, at that point, a one per cent difference in what it costs you to invest per year, compounded over many years, has a very big impact. So, the second thing after diversification, I would say, is cost control.
Robin Powell: Now, you might expect a distinguished financial academic to recommend a complex investment strategy. But Professor Dimson recommends that you keep it simple.
Elroy Dimson: It’s very difficult to have a strategy if it’s complicated and involves lots of change. So, a strategy of putting your money into a simple kind of structure — where you don’t get reams of paper by way of reports, which you’ll have to spend a lot of time on — but a simple report on how you’re doing, and a strategy which is persistent over time: that I think actually has more value than people appreciate.
Robin Powell: So, there you have the basic principles of successful investing.
Diversification, cost control and simplicity. Focus on those three things and you can’t go too far wrong.