Common Sense Investment Rules

“The business schools reward difficult complex behavior more than simple behavior, but simple behavior is more effective.” – Warren Buffett

Just a simple post today.  These are my common sense investment rules.

Common Sense Rules That Will Ruin Your Investment Portfolio
1. Trying to consistently “beat the market”
2. Trying to forecast the market in the short-term
3. Making your investment decisions based on the economy
4. Making your investment decisions based on your political beliefs
5. Forgetting about the time horizon of your investments
6. Utilizing more risk than you are willing, able or need to take
7. Trying to time the market
8. Letting fear and greed dictate your buy and sell decisions
9. Becoming overconfident in your investment abilities
10. Not admitting to the fact that luck plays a large role in our results
11. Incurring a large amount of transaction costs
12. Not utilizing diversification to lower your risk
13. Investing in the markets as you think they “should be,” not as they actually are
14. Basing your investment decisions on envy
15. Investing in a product you don’t understand
16. Basing your investment decisions on what is said on CNBC
17. Following every move in the market
18. Constantly checking the value of your portfolio

Common Sense Rules That Will Help Your Investment Portfolio
1. Dollar cost averaging
2. Rebalancing to sell some of your winners to buy some of your losers
3. Keeping your costs low
4. Thinking long-term (years or decades instead of days and months)
5. Matching your risk profile with your time horizon
6. Automating good decisions
7. Using a process over a forecast for your investment plan
8. Learning from your mistakes
9. Admitting there are unknowns in the market you can’t prepare for
10. Doing nothing from time to time
11. Making asset allocation the centerpiece of your investment plan
12. Basing your decisions on your long-term goals, not the short-term moves in the market
13. Acknowledging that less is more
14. Admitting that luck plays a role in our investments from time to time
15. Investing in products that you understand
16. Diversifying globally
17. Focusing on what you can control
18. Ignoring the daily noise and living your life

Feel free to share any additions in the comment section below.

 

 
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  1. Martin commented on Aug 02

    Ben, I agree with all your bullet points you mentioned. It is a great list and I liked to see that someone is advocating trimming winners and reallocating into losers. I have seen this advice only in relation to 401k accounts, never when speaking about an individual accounts.
    One point I do not agree with you – trying to consistently beat the market. I try that all the time by saving cash when my stocks are shooting to the sky and buying them when they are on sale and everybody around is panicking. It worked for me well so far.

    • Ben commented on Aug 02

      Right, the point was that even the best in the game don’t try to consistently beat the market in the short term. Buffett always talks about waiting for the fat pitch. They call it the Babe Ruth effect – it doesn’t matter the amount of times you’re right, but the magnitude when you do make investments that determines your performance.

      Also, I think the majority of investors shouldn’t base their investment decisions on a benchmark or market like the S&P 500. They will do much better by focusing on asset allocation and staying diversified than trying to compete with other investors. They should focus on hitting their long-term goals, not beating the market.