Diversification has been considered a key to success in investing world. “Don’t put all your eggs in one basket” is the brilliant advice which has been used as a thumb rule by many successful investors. Rightly so, one can reduce the risk by expanding the portfolio and by adding more financial instruments rather than sticking to one type. The most successful investors recommend diversifying the stock portfolio and the main reason behind this advice is the volatility of the stocks, which increases the risk for many investors. By diversifying, one can protect the investments against volatilities. However, most of us have never heard of time diversification, which is equally important when it comes to success in investing. Here is how an investor can use time diversification.
Stay Longer in the Game
Time diversification refers to keeping your portfolio for a little longer and thinking a broader time horizon than the short term vision. Many investors are not able to make gains because of their short-sightedness and their tendency to act quickly. Any news related to a particular stock going southwards prompts these impatient investors to sell their stocks and look for a better one. When it comes to investing in mutual funds, most of the people tend to be enamored by the latest performance of a mutual fund. Rather than looking at the consistency, most of the newbie investors rely on the recent news and information and the result is entering or exiting a fund at the wrong time. Now, this is not the way you can win the game. In his book, Behavioral Finance and Wealth Management: How to Build Optimal Portfolios, Michael M. Pompian suggests “holding on the volatile investments such as stocks and long term bonds for a longer period of time can soften the effects of such fluctuations” and “if an investor cannot remain in a volatile investment for a longer period of time, he or she should avoid that investment.”
Do not switch between Different Stocks
Many investors keep switching between mutual funds in order to earn higher returns and this reduces the overall return because the fees for switching are too high. The main advantage of time diversification is that your investments are spread across various time cycles that are needed to earn an optimum return on your investments. Rather than acting quickly on the basis of latest news, it is important to wait and see the investment cycle and get maximum returns. In other words, you need to stick to a set of stocks for longer period in order to increase the odds of winning.
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant”—Warren Buffett
Maintaining a good lifestyle and buying fashion accessories and expensive gadgets does not hurt anyone. In fact, it should not. However, using your credit card to pay for those expenses may hurt you in the long run. Well, using credit card is not bad at all, if you maintain a good financial discipline and pay off all your debts without hurting your credit score. However, as Warren Buffett has said, “Chains of habit are too light to be felt until they are too heavy to be broken.” It is indeed difficult to get out of debt, if you are in the habit of borrowing to fulfill your personal desires. This is the reason why personal debt has risen dramatically over the past few years. However, all debt is not bad. Buying your first home with the loan is not bad because you are building asset/wealth, which gives you equity over the period of time. In fact, in business terms such kind of debt is termed as leverage where your returns are higher than the interest you have to pay on your loan. On the other hand, loan for personal consumption such as enjoying vacations is not leverage, it is a debt trap. Here is what some of the great minds have to say about debt.
“Bad Debt is sacrificing your future day needs for your present day desires” –Suze Orman
“You can’t be in debt and win. It doesn’t work” –Dave Ramsey
“Rather go to bed without dinner than to rise in debt”—Benjamin Franklin
“Bad debt is debt that makes you poorer” —Robert Kiyosaki
“Never Spend your Money before you have it” —Thomas Jefferson
“I do not like debt and do not like to invest in companies that have too much debt”—Warren Buffett
“Small debts are like small shot; they are rattling on every side, and can scarcely be escaped without a wound.”—Samuel Johnson
There is a lot of buzz around investment and everyone wants to know the right stocks to buy. Considering the volatility of stock market, many people are skeptical and look for the advice rather than trusting their own intelligence. Honestly, there is a lot of advice out there, but it is difficult to get a friendly advice from those people who have vested interest. So, why not turn to a friend and as they say a good book is like a good friend. So, I turned to not just one but three good friends to get the best of the investment advice.
Common Stocks and Uncommon Profits by Philip A. Fisher
This is a classic book on investment advice written by Philip A. Fisher, who was touted as a growth investor, investing in companies with above-average growth regardless of the price. This book epitomizes the investment strategy of Philip A Fisher, a very successful investor. He suggests a 15-point prescription to improve your financial health. The book is a must read for all those people who want to make money from stocks and feel that they do not know enough. Here are 3 important questions to ask before buying a stock.
- Does the company have products or services with sufficient market potential and chances of increased sales? (In other words, companies like Amazon and Netflix that have market potential)
- Is the company committed to develop new products or services to increase total sales potentials when the growth potentials of currently attractive product lines have largely been exploited? (Companies like Apple fall under this category).
- How effective are the company’s research and development efforts in relation to its size? (Google is the perfect example).
The Little Book of Common Sense Investing by John C. Bogle
John C. Bogle, the founder of Vanguard Mutual Fund, gives a common sense advice to all the newbie investors. His investment strategy which is focused on low cost index funds as opposed to the actively managed mutual funds is summarized in the entire book with the help of examples and parables. The book is an ocean of investment ideas, but here are three pearls that can be picked
- Index funds eliminate the risks of individual stocks, market sectors and manager selection. Only stock market risks remain.
- Investing in equities is a winner’s game. However, after deducting the cost of investing (brokerage, portfolio transaction costs, investment management fees etc.) beating the stock market is a loser’s game.
- Don’t do something. Just stand there. The higher the investment activity, higher the costs and taxes and lesser the net returns. So, just stick to the best picks.
The Intelligent Investor by Benjamin Graham
Benjamin Graham is considered father of value investing, where the focus is on looking at the intrinsic value of the company and buying stocks at the lower price than the basic price and this helps an investor to get higher returns. Benjamin Graham developed the core principles of investing by utilizing his experience and intelligence in the area of value investing. This book is special for another reason because Warren Buffett, the successful investor, is the student of Benjamin Graham. Here are three takeaways of this book.
- A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in actual business and its underlying value does not depend on its share price.
- The market is a pendulum that forever swings between unsustainable optimism (making stocks very expensive) and unjustified pessimism (making stocks very cheap). An intelligent investor is a realist who sells to optimists while buying from pessimists.
- The future value of every investment is a function of its present price. The higher the price you pay, the lower your returns will be.
Independence Day has passed and there is no better time to realize the importance of financial independence which is like a distant dream to many of us. Financial independence is not just about hoarding enough wealth so that you do not have to work and just relax; it is more about living your dream and achieving your goals. Many people are stuck in jobs they do not like. Many people dream to be entrepreneurs, but they do not dare to take risks. It is the time to reinvent ourselves. It is the perfect time to remember one of the founding fathers of America (Benjamin Franklin), who played a crucial role in the declaration of independence. Although Benjamin Franklin was remembered as statesman, but his financial wisdom was unparalleled. In fact, a $100 bill reminds us of his abilities to manage money. So, this is the perfect time to remember the famous quotes of Benjamin Franklin on achieving financial independence. There are many quotes, but these are my 10 favorite quotes that I love to practice most often.
- Those who would give up essential liberty to purchase a temporary safety deserve neither safety nor liberty.
- An investment in knowledge pays the best interest
- Beware of little expenses. A small leak will sink a great ship.
- By failing to prepare, you are preparing to fail.
- The only thing that is more expensive than education is ignorance
- To succeed, jump as quickly at opportunities as you do at conclusions.
- There are two ways of being happy: We must either diminish our wants or augment our means – either may do – the result is the same and it is for each man to decide for himself and to do that which happens to be easier.
- Being ignorant is not so much a shame, as being unwilling to learn
- One today is worth two tomorrows.
- If time be of all things the most precious, wasting time must be the greatest prodigality.
I invite readers to add their favorite quotes on managing money.
Well, there is definitely a lot of buzz around personal finance and investing and there are so many experts coming up with new strategies to save you money and help you get financial independence. Nonetheless, there are 3 experts that have been my favorite and when it comes to giving real advice, they know the ground realities and their personal failure has taught them many lessons worth sharing.
Suze Orman is one of the internationally acclaimed personal financial gurus. She had worked as financial advisor for Merrill Lynch. Whether it is founding her own financial group called Suze Orman Financial Group or launching her own TV show, Suze Orman has forged her own path. She talks from head and offers a practical advice sometimes not easy to follow. Her biggest claim to fame is her expertise in dealing with money related issues using old-school thoughts and traditional methods. While her methods are conservative, yet she is a reigning queen in the field of personal finance due to simple money saving mantras and downright advice. She has written several books on financial management and she also rites a financial advice column for “O” Magazine. I often visit her blog at http://www.suzeorman.com/resource-center/ to get some real advice.
Dave Ramsey is an expert in the field of finance and real estate. Like Suze, Dave started his own investment group and very soon he tasted the failure and this personal failure motivated him to be financially free. He soon started helping other people with financial problems and his personal experience had helped Dave Ramsey to come up with money saving lessons. Ramsey is the creator of Financial Peace University, which is known for biblical teachings on finance and money. He has his own radio show and has written many New York Times Best Selling books. Dave’s claim to fame is his simple lessons on money and strong focus on encouraging people to live debt free. It is a joy to read Dave’s blog at http://www.daveramsey.com/blog/
Robert T. Kiyosaki
Robert Kiyosaki is famous for his contemporary approach to finance literacy. His claim to fame is the “Rich Dad Poor Dad” a book that made Robert Kiyosaki, an internationally acclaimed finance expert. He is an advocate of finance literacy for kids and believes that just like other subjects; financial literacy should be taught in schools. Robert Kiyosaki is not only an investor but also a successful entrepreneur who owns many businesses. He reveals his money making and money investing secrets in his blog at http://www.richdad.com/resources/rich-dad-financial-education-blog
While the above list is based on my personal choice and opinion and if you have some experts who have influenced everyone in a big way, please share in the comments section.