All investment strategies can, in principle, be summarized in two questions. Do I have the ability and competence to 1) find incorrectly valued companies? 2) Predict market movements? You will arrive at different investment strategies depending on how you answer these two questions. That is a set of rules and ways to invest your money. It can sum it up in a plan for the guru, one for the analyst, one for the trader, and one for the rest of us, i.e., the small savers.
Below, I have tried to summarize our strategy in several rules with justifications. The advantage of this strategy is that it does not require any skills to get started, can be created in one evening, and does not need to be maintained for several years. It should not be something new for you, those following us for a while.
Do Not Try to Find Wrong or Undervalued Companies; Instead, Buy All Companies in all Markets
Several studies have shown the fruitlessness of being a better analyst than others. 99.4% of all professional fund managers fail to beat the index (= the average for the entire market) over time. The majority of all small savers underperform year after year against the index. Two professional fund managers who manage more than $500 million expressed that it is challenging to analyze better than others. They feel the market was wrong about long-term valuations, especially in the multiple studies. If professionals like them have a tough time doing better analysis, and given the time, experience, and skills, how do I do it better as a small saver?
Do Not Change the Strategy as Long as the Goals Do Not Change
One of my most common mistakes is changing my strategy when market conditions have changed. I have had 100% equity exposure, and then the market has fallen by 20%, and it has not felt easy. I have sold assets and reduced the risk to make it feel less complicated. You should avoid this mistake by doing the right thing from the beginning. My rule is that the strategy and asset allocation should only change if my goals change, not if the market changes.
Save Monthly Regularly
Saving monthly is one of the best things you can do for many reasons, not least because it improves returns for a long time and makes declines smaller. The reason is that when you save monthly in a downturn, you get more shares at a lower price, boosting the way up.
Focus on Getting the Right Balance in Savings Between Shares and Interest Rates Through, e.g., the Four-Bucket Principle
My experience is that most – incl. I – is at risk. Either you have too little chance, or you have too much trouble. Both are equally wrong because they can lead to insufficient money. If I have too negligible risk, the amount never grows to my need. If I take too much trouble, then maybe I reach the sum but lose a large part of it when the market turns, and I am in the same situation where the money is insufficient.
Realize that You are the Biggest Enemy of Your Money Through the Behavioral Mistakes You Will Make
I have reflected that most of us lose more money in our savings on behavioral mistakes than we do due to the market. It is about everything from the fact that we think the market is highly valued and we do not want to save now, or that we think it will go down, or that we panic when it goes down, that we are wrong in risk, that we do not sell what goes wrong and so on.
In principle, the above rules only talk about the WHAT and WHY of investment strategy. However, in the simplest case, it is about setting up regular savings on a fund.
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