Investing
How to invest?
You will not find any specific investment advice here. For general advice, one of the better books out there is "A Random Walk Down Wall Street" by Burton G. Malkiel. Some of the main points of advice in the book:
- Diversification makes sense, up to a point. Beyond about 50 stocks, there is no further benefit. Also diversify across asset classes. It makes sense to have a few smaller investments in your portfolio that are highly uncorrelated to the market.
- More risk yields more return, although there is no single accurate measure of risk, making it hard to assess exactly what asset fits best with your risk preference. Also keep in mind that often more (promised) return means more risk.
- Avoid herd behaviour: "any investment that has become the topic of widespread conversation is likely to be expecially hazardous to your wealth".
- Avoid overtrading: in a study by Barber and Odea of 66,000 households, they found an average return of 16.4%, versus 17.9% for the market, with high frequency traders making only 11.4% and women outperforming men because women trade substantially less.
- If you do trade: sell losers not winners: "a paper loss is just as real as a realised loss", except that a realised loss can help with capital gains tax.
- Be wary of IPOs, on average they underperform the market by 4% per year for the first five years
- Stay cool to hot tips
- Distrust foolproof schemes
- Overall, the market is remarkably efficient: two thirds of professional investors underperform the market over long periods of time. Inefficiencies do occur from time to time but are rarely persistent in a way that allows invididual investors to exploit these inefficiencies over an extended period of time.
- Indexing makes sense, ETFs help minimise the impact of capital gains tax
- Avoid mutual funds with front loaded fees altogether, and also mutual funds with fees above 0.5% per annum, or turnover of more than 50% per annum, as turnover is also costly.
- Buy closed-end funds at a discount to Net Asset value.
- If you buy individual stocks:
- Buy those that appear able to sustain above average earnings growth for at least five years
- Never pay more than can be reasonably justified by a fundamental value
- Buy stocks with stories of anticipated growth on which investors can build their castles of air
- Trade as little as possible