Investing Based on Principles: Tuning Out the Financial Porn

Investing Princples
Getting financial info from a newspaper. How quaint.

With the advent of the Internet, stock investing was suddenly democratized. In a very few short years, it became possible for “regular folk” to invest directly in the stock market. Individual investors were no longer obliged to trade through a stock broker. Mutual funds didn’t need to be bought through a bank. Fees and returns could be compared easily. Information about companies financial situations was available for anyone who took the time to visit a company’s website and spend the time reading the vast quantities of information posted there. All of this is great; more information is always better, right?

Well, no. Especially when you’re getting started. Too much information quickly becomes confusing, and very shortly thereafter, overwhelming.

Like anything else, too much information is a bad thing. (Caveat: This is true unless you’re a professional investor, or investing is your chosen hobby.)

A few years ago, my father attended an information session about investing at his local bank. I wasn’t there, so I can’t comment in any great depth about what was said, but my father did relate one detail to me that I would like to share because there is wisdom in it. The two people making the presentation urged their loyal customers to stay away from – their term, not mine – “financial porn”. They defined financial porn primarily as BNN, but also included Internet forums, financial magazines, and, yes, personal finance blogs.

A quick aside: was this a new twist on the “trust us to take care of the details” spiel? I don’t know. Like I said, I wasn’t there. Regardless of their motivation though, it was pretty good advice.

The amount of information available today is enough to make a new investor’s eyes glaze over, and/or paralyze him with fear of making a costly mistake. The problem with being bombarded with so much information is that one very quickly loses the forest for the trees, and daily gyrations in the market can seem cataclysmic.

Especially when getting ready to step into the market for the first time, and indeed, this is good advice no matter how long one has been investing in the stock market, the best thing to do is to tune out the porn and focus on sound principles. Each one of these point could easily become its own post – and probably will some day – but for now, let’s just look at them in sum, because they all go together. This list is by no means exhaustive, but it’s a pretty good starting point for people considering getting into the market.

Investing principles

  • Diversify. Spread your investments across different companies, industries, and (as the standard advice goes) different economies. Personally, I only invest in Canadian companies, but this makes me somewhat of a heretic in the eyes of many investors. An easy way to diversify quickly and easily is to invest in low-cost index ETF’s.
  • Invest, don’t speculate. When you get into the market, it should be for at least several years, and preferably for several decades. If you want to benefit from the long-term growth of the economy, you have to be invested for the long term. Sure, some people make loads of money in short periods of time speculating, but they often lose it just as quickly. If you’re like me, your goal is to secure your financial future, not go on a financial roller coaster ride.
  • Look for reliable dividends. This isn’t everybody’s investing style, but it sure as heck has become popular over the last decade. With a sufficient stable of dividend-paying stocks, you can live off an ever-increasing stream of tax-advantaged income. Personally, I don’t understand why anybody would try to invest any other way.
  • Start as early as possible. The simple fact is that the longer you’re invested in the market, the more you will benefit. I’m talking in terms of decades and generations, not months and years. True, young people often don’t have a lot of money to invest, but it’s important that they invest as soon as they can to enjoy the benefits of compounding interest.
  • Invest regularly. Trust me, there is always a crash just around the corner. Or a runaway bull market. Or years of going sideways. Investors have a saying: It’s not timing the market, it’s time in the market that matters. Have there been times in the past when it would have been advantageous to play the market in a certain way? Of course. But those times only become obvious in hindsight. Don’t let anybody tell you any different. The key is to  put away a bit of money regularly. Monthly is ideal for most people. One of the major benefits of investing in dividend-paying stocks is that the stocks themselves provide you with new money to invest if you can’t set aside money from your regular income (which you really need to try to do, by the way!)
  • At the risk of sounding like your Grade One teacher, doing anything is better than doing nothing. Even if it seems small and insignificant now, the journey to financial security begins with the first step, so get going!

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