By Jeremy Wallace
Is investing an art or a science? If you want to succeed in investing, does it take a set formula or skill and talent? Over the past century, many of the world’s leading economists have studied the art—or science—of investing. Dozens of investing theories, models, and systems have been created, most of them requiring a PhD to understand. But when it comes to learning how to invest, sometimes it’s best to turn to the people who actually do it for a living, the people who are putting the theories into practice and seeing the results (or lack thereof). People like Peter Lynch.
From 1977 through 1990, Lynch ran one of the most successful mutual funds ever, posting an average annual return of 29%. Over his career, Lynch shared many investing principles, but there are seven in particular that all investors should keep in mind. (1) On that note, take a look at Peter Lynch’s 7 rules of investing.
1. Know What You Own
The investment world can get confusing. It’s not surprising, then, that 40% of Americans don’t know how their investments are allocated. (2) With a plethora of options, like a 60-40 or 50-50 breakdown of stocks and bonds, target date funds, and actively or passively managed funds, it’s easy to get overwhelmed. Instead of getting caught up in the confusion, invest in companies, industries, and funds you understand well. What do they do? Who uses their goods or services? Is it a company you would want to do business with yourself?
2. Prediction Is Futile
Wouldn’t it be wonderful to have a crystal ball to predict where the markets will go or what the economy will do? Unfortunately, it’s not that simple. Don’t worry about what you can’t control. Channel that energy into focusing on the factors you can impact, such as the types of companies or funds you invest in, how much you save, etc.
3. Take Your Time
You may want to check financial tasks off your to-do list in a hurry, but remember, investing isn’t a race. You have plenty of time to do your research and find outstanding companies to invest in. Follow the tortoise’s example, not the hare’s.
4. Avoid Long Shots
Investing isn’t gambling, either. While we have no control over the markets, we do have control over how much risk we take on. The level of risk you take should correspond to your age, time horizon, and goals. Your portfolio isn’t the place for speculation or bets. For that, head to Vegas.
5. Buy Good Companies
We often hear stories about someone who took a risk and invested in an unknown, up-and-coming company and hit it big later, but this is just another form of gambling. Invest in companies that have proven management, a strong business model, and that sell things people actually use.
6. Learn From Your Mistakes
When you look back on the past, are you filled with regret at how you made bad investments or took advice from the wrong source? Even the greatest investors sometimes get things wrong. When that happens, accept it humbly and try to determine how you can improve. Instead of dwelling on what you wish you could have done differently, learn from your mistakes, reflecting on what worked and what didn’t. Then take your newfound insight and wisdom and move forward.
7. Before You Buy, Be Able To Explain
A good rule of thumb in investing is to make sure you actually understand what you are investing in. Before investing, can you explain to a family member what you’re buying and why? Can you describe how that company or fund works? If not, take your time, do more research, and cover your bases. This is your hard-earned money we’re talking about.
Rules To Live (Or Invest) By
Ultimately, all investing comes with risk, and there is no strategy or rule that guarantees success. But some risks are avoidable and some are not. These seven investing rules can help you make smart, simple investment decisions. And best of all, you don’t need a PhD to understand them!
If you are ready to take control of your money and stay informed about your investments, our team at Wallace Hart Capital Management would be happy to meet with you and discuss how we can help. To get started, contact us at 859.300.3030 or request an appointment online today!
Jeremy Wallace is founder and chief investment officer at Wallace Hart Capital Management, an independent financial services firm committed to offering comprehensive advice and customized services. Jeremy has 20 years of experience in the financial industry and is passionate about helping clients preserve and enhance their wealth so they can pursue their passions. Jeremy graduated from Emory University with a degree in international economics and a certificate in financial planning. Outside of the office, Jeremy spends most of his free time with his wife, Julie, and their three children, Isabel, Lincoln, and Reid. He is an avid Chicago Cubs baseball fan, and he enjoys golfing with his wife and traveling with his family. Learn more about Jeremy by connecting with him on LinkedIn.
(1)”The Greatest Investors: Peter Lynch” https://www.investopedia.com/university/greatest/peterlynch.asp