The Most Important Thing In Investing
September 26, 2008 – 5:09 amWhat’s the most important thing when it comes to investing? All the finance geeks are probably screaming “asset allocation!!!”. I don’t think so. Here’s my list of the most important things to remember when investing. I struggle with a lot of these, but here’s the list regardless:
- How Much You Save. Asset allocation is important, but I don’t think it will (usually) outweigh saving more
- How Early You Start. I would have listed this as #1, but I thought that if you didn’t save anything it wouldn’t matter how much time you had.
The more time you have the better. Most of your portfolio value will be generated in the last few years before retirement. That’s one of the reasons delaying retirement can be so beneficial. - Asset Allocation. Studies have shown that asset allocation determines the majority of success as an investor, assuming everyone started at the same time and invested the same amount. That is why asset allocation is #3 on my list.
- investment costs. Costs will eat up returns like you wouldn’t believe over time. It’s also surprising the fund companies rarely lower their expenses, even though they have more assets to manage each year! Where’s the economies of scale in the mutual fund management business?
- Asset LOCATION. Tax efficient investing is critical to success. With real rates of return expected to be in the 4-6% range in the near team (at best), losing a percent or two from taxes is a killer. Asset location falls behind investment costs in my list because investment costs are relentless. You pay them every year, year after year. And don’t forget that trading costs and bid/ask spreads aren’t reflected in the expense ratio for mutual funds. That’s one of the dozens of reasons index funds can make sense.
- Rebalancing. Rebalancing forces you to buy low and sell high, and usually allows you to reduce risk.
Thoughts?
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4 Responses to “The Most Important Thing In Investing”
I think that when you start, many investors don’t realize at the beginning the powerful tools that dividends, compound interest and understanding what you invest in.
Getting down the fundamentals from the beginning are likely your best changes for success over the long-term. By all means those aren’t the only tools you need to use, but balance is key in any strategy.
There’s a lot of information out there for people to start with and sometimes its just keeping things simple that gives you the best results.
By Dividends Anonymous on Sep 26, 2008
How early you start – no doubt! The earlier you start, the more mistakes you can make and learn from. The experience is hard earned and generally expensive – move that one to the top of the list.
By Eric on Sep 27, 2008
I agree, starting early and actually putting in money are at least as important as asset allocation. I think what people are concerned about at this point is that many have put in money but haven’t allocated it right. Not allocating could cost them the advantage of their early start and previous investment.
I had one boss, for instance, who thought it was a good idea to have maybe 1/3 of her retirement portfolio in company stock. If the company fails, then not allocating properly could undo her having invested early. Fortunately, the company started matching her contributions to the target retirement fund she was buying, instead of giving her company stock. For her, I think a target retirement fund is probably the best choice.
By Mrs. Micah on Sep 28, 2008