Tips for Investing: Important Lessons from the Experts
Investing is both an art and a science; investors learn valuable lessons over time and with experience. However, most people want to learn without trial and error - instead, they seek expert advice. Our team at Ascent Accountants have significant collective experience supporting investors in navigating market cycles and trends. The following are nine key lessons that have stood the test of time.
Recognise the Cycles
An investing constant is the cyclical nature of markets. There are always phases of growth and downturns, with cycles repeating over time. Maintaining a long-term perspective during both the highs and the lows is essential, knowing that each cycle has its time.
The Crowd Isn't Always Right
Investor psychology often leads to herd behaviour, and when large groups of people make the same mistakes simultaneously, it can substantially affect the markets. Following the crowd can be tempting, but evaluating whether that approach is right for your strategy is crucial. Frequently, the crowd gets it wrong, and it's wise to go against the grain.
What You Pay Determines What You Get
The price at which you buy an asset is a significant factor in its potential returns. Lower-priced assets offer more room for growth, while overpriced assets may be overvalued. Metrics such as price-to-earnings ratios for stocks or bond yield can help guide your decisions, helping you evaluate each asset critically.
Predicting Markets is Difficult
Even professional market forecasters are influenced by the same emotional biases as regular investors, making accurately predicting markets challenging. For most investors, focusing on the long-term return trajectory rather than short-term movements is a better approach. Patience is critical if you want to reap investment rewards.
Markets Repeat the Same Mistakes
History tends to repeat itself, especially in the investment world. Investors continually fall into the same traps, often driven by fear or greed. Understanding that markets don't learn from the past can give you an edge. Stay current and aware of market extremes and resist the temptation to act on panic or euphoria.
The Power of Compounding
Over the long term, reinvesting returns can dramatically grow your wealth. If $1 had been invested in Australian shares in 1900, it would be worth almost $880,000 today. In contrast, $1 invested in cash would only be worth around $259, and bonds would yield about $924. This stark difference highlights the compounding power of shares over time.
Keep it Simple
The complexity of financial markets can be overwhelming, so keeping your investment strategy simple is often the best approach. Don't overcomplicate things, manage your debts wisely, and ask when you need help. Understanding, forward planning, and taking manageable risks yield better results over the long term.
Know Yourself
Every investor has their own risk tolerance and psychological tendencies. It's essential to understand your preferences and manage your weaknesses accordingly. A self-managed super fund or frequent trading might work for you if you prefer being hands-on with your investments. If not, a more passive, long-term strategy may be better.
Optimism Pays Off
At the heart of every successful investment strategy is optimism. Investors need confidence in the ability of banks to safeguard deposits, in borrowers to repay loans, in companies to grow profits, or in properties to generate rental income. Belief in the fundamental mechanisms of the economy is essential to take the necessary steps to start.
Get Support on Your Investing Journey
Investing requires patience, discipline, and self-awareness to help you build wealth steadily over time. Contact our Ascent Accountants team for further advice or assistance in managing the tax on your investment portfolio.
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