Stick to Your Principles!: 9 Tips for Maintaining Balance in your Investments
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Stick to Your Principles!: 9 Tips for Maintaining Balance in your Investments

A few months ago, the Wall Street Journal ran a front-page story detailing how it's legal for nongovernmental providers of key data series, such as the University of Michigan Consumer Sentiment poll or the Purchasing Managers' Index, to release customer research reports early to those willing to pay for it.

Research reports can move markets, and those who get the business intelligence in advance can make millions from receiving this information early. What's striking is that the early information is received seconds before public release--not minutes, hours, or days--and they're still profiting mightily.

This phenomenon is not unlike what's happened in the investment business over the past several decades. Daily trading activity today seems to be dominated by those with hundreds of billions in assets under management, computer-based trading systems, and media-induced "noise"; even as the average time between an asset's purchase and sale has shrunk from a couple of years to a couple of months. So what's the individual investor to do without those advantages? The right mindset and these key investment principles might help level the playing field.

  1. Do your homework (or hire someone who does theirs). Investing takes hard work, diligence, and time. Some people love doing it themselves, and ample resources are available today to help. However, it's unreasonable to think you can spend a few hours uncovering some gem that a highly educated professional armed with analysts and a supercomputer hasn't already found. If you don't have that amount of time or energy to devote to the activity, hire a firm with a time-tested and thorough due diligence process for picking their asset classes and specific investments.
  2. Know yourself. Do your research, but test your theories with others. Behavioral finance has documented many different ways that we are wooed into making faulty investment decisions. Debating others on investment ideas is crucial and can lead to better and more consistent results, whether your investing is self-directed or done by a financial advisor.
  3. Valuation matters. The best fundamental research is useless if you don't pay attention to how over- or under-priced an asset is. The basic concept in investing is to purchase at a discount to what you have calculated the long-term ultimate value is, and then sell when that valuation has been reached or exceeded (or when fundamentals break down). Sounds simple, but many individual investors often get swept up into wanting to buy an asset because they're going up, not because they understand how the current price relates to the intrinsic value.
  4. Focus on returns, not prices. Almost any asset has a clearing price on any given day (the monetary value determined by the give and take of the market's bid-and-ask process). In the past few years, as banks in developing markets have shed "bad" credits from their balance sheets, distressed debt purchasers have scooped them up. If you buy at 25 cents on the dollar, you can double your money when someone else buys it for 50 cents. Be primarily concerned about how much you need to get out of the asset to go on to your next transaction.
  5. Watch costs. It's been a long time since we've seen normalized inflation of about 3 percent per year, but at some point the global economy will be strong enough for central bankers to let it reappear. Further, tax rates on dividends and capital gains are up 33 percent over last year; 59 percent for those in the top brackets. While the tax tail should never fully wag the investment dog, higher costs and inflation will likely play a much bigger role in investment decisions moving forward.
  6. Ignore the "noise" in investment news. I had my first quote in the Market Place column of the Wall Street Journal when I was 23 years old. I remember thinking to myself how odd that was, given my young age, and from thence sprang my healthy skepticism of quoting "investment experts." Investment journalists need to fill space, and are always trying to back into some excuse for why the markets moved on a particular day. Know what asset you want to buy and at what price. If you've done your homework, you'll be ready to move.
  7. Become a trend-spotter. While ignoring the short-term investment rehash, read up on overarching long-term trends--like the implication of 3 billion more people moving into the middle class worldwide by 2030, and what that will mean for real estate, infrastructure, commodities, real assets, and more.
  8. Be patient. Sometimes the best decision is to do nothing. If your homework is thorough, you bought your investments at a comfortable discount to their inherent value and the fundamentals are playing out, so it's easier to ignore short-term wiggles and stay put--especially when transaction costs are higher than they used to be.
  9. Stop thinking all or nothing. Many folks try to time entry into the market or specific investments in an all-or-nothing fashion, despite reams of analysis showing this is virtually impossible. A well-rounded investment program instead prepares for more than one potential outcome, providing for flexibility and adaptability should the unforeseen emerge.

While it can be tempting to think that the individual doesn't stand a chance today in investing, with a plan and a strong set of guiding principles, ample opportunities exist for success.

Carol M. Schleif, CFA, is regional chief investment officer at Abbot Downing, a Wells Fargo business that provides products and services through Wells Fargo Bank, N.A. and its affiliates and subsidiaries. She welcomes questions and comments at

Published: January 20th, 2014

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