The reason many people do not have a satisfactory investment experience is that they don't understand how long-term wealth is created. They assume that investment success depends on picking a hot stock, finding an all star investment manager, or avoiding market downturns.

In fact, the blueprint for investing success is simple and straightforward. But using this blueprint effectively involves rethinking your notion of investing and following a prudent approach.

The highlights of the blueprint follow. We’ll expand upon them in future articles, but here are the key principles and actions leading to a better investment experience:

1.   As an investor you need to understand markets and let them work for you.

  • Take only those risks worth taking, focusing on investing as opposed to speculating.
  • Bear in mind the lessons of history, which show that investors can expect a long-term return on their capital.
  • Remember that as market participants respond to new information, prices constantly adjust toward a state of equilibrium where risk and return are related. This is why investors cannot reliably earn above-average returns without accepting higher risk.

2.   Learn how to harness the power of the markets. Investing is about structuring a portfolio of assets to capture risks that have an expected return and minimizing risks that do not. Manage the factors you can control (asset class exposure, broad diversification and cost reduction) and make sure your portfolio reflects your investment objectives and risk tolerance. In short,

  • Hold multiple asset classes
  • Practice smart diversification
  • Keep your costs low

3.   Realize that investment performance typically depends on investor behaviour. So the cardinal rule is: Know yourself and manage your emotions and biases.

  • Don’t confuse entertainment with investment advice.
  • The better you understand how you make decisions and recognize the role of external forces in shaping your perceptions, the better you will be able to control your instincts. This will help you to avoid the biases that lead investors astray.

4.   Stick to your plan in order to avoid common investment mistakes.

  • You should have a long range plan that charts a realistic course of action leading to your retirement and eventually to the distribution of your estate.
  • Your strategy should reinforce realistic time perspectives and help you avoid mistakes that may compromise portfolio returns.
  • Over time, a disciplined approach in all types of market conditions will improve your odds of investment success.

In summary, keep these key concepts top-of-mind for a better investment experience: diversification is your friend, keep your costs low, don’t try to time the markets, and execute on a well structured plan related to your future needs and your portfolio objectives. And remember the advice of the famous economist Eugene Fama Jr., “Your money is like soap, the more you handle it the less you have.”

Daryn Form is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada.  The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above.  The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.  Rates are not guaranteed and are subject to change at any time without notice.