1. Develop a well-defined investment plan that is specific about your return goal, your tolerance for risk (your ability to have exposure to short term market price volatility), your time horizon, and your need for income. If you are saving for retirement, understand what amount of income you will need in retirement, and work back from there to understand how much you need to save while you are working.
2. Understand both the average return and the likely range of returns for key investment asset classes — cash, bonds, and stocks. In other words, use reasonable return expectations to guide your investment decisions.
3. The most important variable in investing is time horizon – the longer, the better. Compounding is the investor’s most powerful weapon, and the length of time that you invest has the biggest effect on your ultimate investment results. The earlier you start to invest, the more capital you will have at the end. A 7% return doubles your money every 10 years.
4. Valuation is critical – it is imperative to know how an investment is valued because that tells you about the likely return and risk in that investment. Use valuation to turn the probabilities of investment success in your favor. Have a familiarity with the basic tools and metrics of valuation for the investment that you are considering.
5. Asset allocation of capital between asset classes is more important than individual security selection within asset classes in determining long term investment results. Allocate more capital to the most undervalued asset classes, and rebalance at least annually.
6. Reversion to the mean is the most powerful force in the capital markets – use it to your advantage.
7. Diversification is important, but over-diversification hurts returns.
8. Understand risk from as many perspectives as possible: credit, liquidity, business, market, industry, company specific, people, etc. Know what you know, know what you don’t know, and know the difference. Have a deep understanding of what you are invested in. Understand psychological risk (the inherent biases that lead to sub-optimal investment decisions) and be vigilant to mitigate it.
9. Have an investment process that fits your investment goals and risk profile, and be disciplined within that process. Or, hire a professional to manage your investments that has an investment philosophy and process that you understand, makes intuitive sense, and that you are comfortable with. If you hire a professional, be aware of all costs and expenses, have a healthy skepticism, and ask questions. Total costs and fees for investment management should approximate 1% of the market value of your portfolio annually.
10. Have a strong bias to quality, because over the long run, quality wins out.