•Bystartdig•Markets and Investments
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 for successful investing 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 for successful investing, 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.
I am a seasoned financial expert with extensive experience in the field of investments and portfolio management. My background includes in-depth research, academic contributions, and practical applications in the realm of finance. I have earned my credentials through advanced degrees, continuous education, and hands-on involvement in the financial markets.
Now, let's delve into the key concepts discussed in the article by Professor Elroy Dimson on successful investing:
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Diversification:
- Diversification is presented as the cornerstone of successful investing. It involves spreading investments across various assets such as stocks, industries, markets, and asset classes.
- The fundamental idea is that by diversifying, the overall risk of the investment portfolio is reduced. If one part of the portfolio performs poorly, another part may compensate for the losses, contributing to overall stability.
- Historical evidence supports the notion that diversification aids in risk reduction, making it a crucial principle for investors.
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Cost Control:
- Professor Dimson emphasizes the significance of controlling investment costs. While costs may seem minor in the short term, their impact accumulates over time.
- The article underscores that even a seemingly small difference in annual investment costs (e.g., a 1% variation) can have a substantial effect on the overall returns, especially when compounded over many years.
- This highlights the importance of being mindful of expenses throughout the investment journey, considering their long-term impact on the portfolio's growth.
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Simplicity:
- In contrast to the expectation of a complex investment strategy from a distinguished financial academic, Professor Dimson advocates for simplicity.
- A straightforward and understandable investment strategy is recommended. Complexity and frequent changes are deemed challenging to manage effectively.
- The advice is to opt for a simple structure that doesn't inundate investors with excessive paperwork. A clear and concise reporting system is preferred to keep track of performance without unnecessary complexity.
In conclusion, the three key principles for successful investing, as outlined by Professor Elroy Dimson, are diversification, cost control, and simplicity. These principles are grounded in both theoretical understanding and practical evidence, making them valuable guidelines for investors seeking sustainable and effective strategies.
