There are thousands of books in print about successful investing. And there’s a deluge of information about it on the internet. But how do you distill everything that there is to know into three key concepts? We asked Professor Elroy Dimson from Cambridge University to do just that.
1. His first principle is diversification.
Diversification is one of the linchpins 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 the diversification will aid your portfolio by reducing risk.
So make sure you spread your risk by diversifying.
2. Control how much you pay.
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 1% difference in what it costs you to invest per year compounded over many years has a very big impact.
So the second thing after a diversification I would say is cost control.
3. Cost control
Now you might expect a distinguished financial academic to recommend a complex investment strategy, but Professor Dimpson recommends that you keep it simple.
“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 have to spend a lot of time on, but a simple report on how you’re doing”.
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.