3 of the less obvious investment principles

If you’re working on your financial education then here are three of the less obvious investment principles you should always bear in mind:-

1. Fear is your friend:

As anyone with an interest in investing will recognise, financial markets by can be volatile and the extremes can be a challenge for even the most experienced investors. Volatility goes with the territory.

There are times when it all feels like a bit of a roller coaster ride. So if you’re going to profit from being an investor then you do need to have your wits about you. Feeling fearful occasionally goes with the territory too.

Fear is a natural emotion which keeps us sharp and it keeps us focused when our personal security could be at risk. So fear is a good thing. It serves to protect us against threats to our safety. Fear is our friend.

Even when it comes to your financial safety, fear is your friend too.

In troubled times we must be careful not to react in haste but remember that our instincts can be a powerful guide to when action is necessary.

That said, with investment, those times when others are truly fearful can be an excellent buy opportunity for the savvy investor. Calm will always return to the market and the savvy investor will have picked up some bargains amongst all the drama. As Baron Rothschild once said, the time to buy is when there’s blood on the streets.

2. It’s never different this time:

Whenever there’s a speculative financial bubble, how many times do you hear people say, it’s different this time? Somehow they think that the laws of financial gravity can suddenly be defied.

From property bubbles to the dotcom bubble people were keen to tell us all that those old laws of finance no longer applied. They believed that prices could keep going up and up and up without any reference to the point at which prices were no longer consistent with anything close to a sensible valuation.

Go back further to the day of the tulip bubble and the South Sea bubble and I’m sure people were still saying it’s different this time.

The nature of a speculative bubble is always the same. Something becomes fashionable and the price of that perceived asset starts to skyrocket, everyone goes crazy and people suddenly feel they must get in on the opportunity before they miss out.

The really savvy people who managed to get in early on the opportunity sense what’s happening, see the asset has become over-priced and they recognise that if they are to turn a profit they need to get out quick. Sentiment turns; early movers do turn a decent profit; and all the mugs lose their shirts.

The harsh reality is that when you spot a bandwagon on which to climb you’ve already missed the boat. I must apologise for the mixed metaphor but remember this; it’s never different.

Irrational exuberance drives prices beyond the point at which they are supported by any real financial logic. When that becomes obvious to everyone, the bubble bursts and prices coming crashing down.

As the great Warren Buffett once said, a pin lies in wait for every bubble and when the two eventually meet, a new wave of investors learns some very old lessons.

If you’re an experienced old hand at the investment game you might just have mastered the art of timing with these things. If not, you’ll steer well clear if you’ve got any sense.

3. Little and often:

Over time water can form great caverns in rock. It doesn’t happen overnight. It happens by the constant drip, drip, drip, effect of water over years and years and years. When it comes to saving much the same applies. It is those regular small amounts that over time can build into substantial wealth.

Regular saving is a good habit to develop and savings accounts provide a reliable place for your emergency fund and also a means for building capital sums for the purchase of other forms of investment.

No one has ever become seriously rich by investing in savings account alone of course. The gains from savings accounts will always be relatively small and over the medium to long term are unlikely even to keep pace with inflation. Nevertheless regular saving this way is a good starting point in wealth creation.

Once you start to build a decent sum you can then look at other forms of investment such as stocks, bonds and property.

Savings accounts are not risk free if that’s your only form of investment. Focusing only on a savings account would mean you miss out on better potential returns elsewhere.

However it is the starting point and by putting a slice of your income away each month it is the first step to take in building capital.

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© Roy J Sutton and Mann Island Media Limited 2017. All Rights Reserved.

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