Six Precepts for the Long-Term Investor

On the subject of long-term investing, a recent Economist article outlines six precepts every investor should keep in mind:

  1. You can’t start too early—compounding is a compelling reason to start saving when you’re young, the article argues.
  2. Risk and reward are related, but don’t think the latter is guaranteed.Risk, the article explains, is not about volatility but rather about loss of capital. “That is why investors should always have some money in cash or government bonds.”
  3. Long-term returns are likely to be lower from here. The article cites GMO forecasts calling for negative real returns for all equity markets except emerging markets. “U.S. pension funds that think they are going to earn 7-8% are deluding themselves,” it says.
  4. Fees are important to consider: “Of course, it is tempting to believe that the higher-charging product will deliver a higher return. But you don’t know that; the one thing you know for certain are the charges.”
  5. Diversify globally. “It is tempting for Americans to think that they don’t need to invest abroad; most of the tech giants are based in the U.S.” But diversifying, the article argues, “protects the investor against currency risk and political mistakes. Economic power is shifting towards Asia…where more than half the global population lives.”
  6. Don’t specialize too much. “The fashion today is to create thousands of different funds, covering ever smaller slices of the market,” the article says, adding, “Unless you are an investment professional who has researched the area extensively, you don’t need this nonsense.”