Greg Davies, a guru in behavioural finance, sets out a Credo for the individual investor
1. Successful investing requires a safe environment – above all it requires sufficient financial liquidity and/or insurance to ensure the investor gets to choose when to sell (is not forced to sell) – Work out what you can afford to invest
2. Getting fully invested as early as possible, at the level of risk appropriate to your risk profile, rather than leaving available capital unutilised delivers the best financial outcomes over time – Put it to work
3. Over time diversification delivers the best returns to all investors for the amount of risk taken regardless of investment amount – Diversify to reduce unnecessary risk
4. The most certain drag on investment performance are costs, fees and taxes. Make sure you know what you’re paying for and why – Reduce costs wherever possible
5. Inaction delivers better financial outcomes than frequent buying/selling – investment returns are about time in the market, not timing the market. Stock picking, currency speculation and market timing are usually costly over time and best left to professionals (if at all) – Do less than you’re inclined to
6. Short term investment outcomes involve considerable luck and it is almost impossible to differentiate luck from skill in the short-term1; in the long term, however, good investment process is likely to pay off – Focus on the long term
7. Long-term investment success requires being sufficiently emotionally comfortable with your portfolio through the investment journey to stick with your plans and follow a good investment process – Reduce your anxiety