Diversification + patience = success
How do you define success? If success for you is to see your
investments grow by 30% and 40% a year and more, then diversification
and patience is not the way. To achieve those kinds of high
returns requires speculation, exposure to high risk and most
important, a great deal of luck.
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"Patience is the companion of
wisdom" St.
Augustine |
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But if your idea of success is to achieve a reasonable return
on your investment with an acceptable level of risk, then
diversification and a long-term outlook are the two keys.
“It's time in the market, not market timing, that
counts”
Your greatest ally in investing is time. In a sense, the
main difference between investing and speculation is the time
horizon. If you look at stock performance (measured by the
S&P index) over just about any 10 year period throughout
the past century, you’ll see stocks did better than
any other financial asset.
Being in the market on a continuous basis really pays. Usually
a large percentage of the growth of any investment in any
year takes place on several key days. If you miss any of those
days, it can cost you dearly. These figures prove it:
10 years on S&P and TSX
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staying invested – earned 8.8%
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missed 10 best trading days – earned 4.7%
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missed 20 best days – earned 1.4%
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missed 50 best days – lost 5.6%
As these numbers show, achieving your investment goals requires
a steadfast focus on the long term. Making dramatic changes
to your portfolio as a response to short-term market events
can be costly.
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"My favourite holding period
is forever." Warren
Buffet |
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One of the worst and unfortunately most common mistakes made
by investors is losing patience or panicking when the market
drops. Unless you have a good reason, like taking a tax
loss, selling an investment in response to a market decline
simply guarantees you a loss that had only existed on paper.
Thinking in the short term can cause you to miss out on the
gains when the market bounces back. And if you look at the
history of the market, after major declines, the market has
always bounced back.
There’s no doubt, stocks can be volatile. However,
the potential for loss, although a major factor in the short
run, decreases significantly the longer you hold them.
Which leads us to three simple rules for investment success:
1. Diversify with all asset classes
2. Be patient and stick to your long-term plan
3. When in doubt, reread rule #2
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homepage.
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