In this episode of the My Money, My Lifestyle podcast, I am joined by investment expert Debra Slabber from Morningstar South Africa, to discuss the fundamental principles of investing.

Discover why simplicity is your ally, how your savings rate impacts your financial future more than you think, and why the best action in a turbulent market might be inaction. The key to investment success lies not in chasing the latest trends or complex products but in embracing simplicity and discipline.

What is a principle and why is it important?

A principle is a belief. It’s a way of living. Principles are those fundamental truths that serve as the foundation of a system of beliefs or behaviour.

Principles and beliefs are what we as human beings gravitate towards, especially when life gets messy. The principles of investing are no different. If you build a solid foundation of investing principles early on in life, it becomes second nature, no matter how hard things get sometimes.

The fundamental principles of investing

Below Debra highlights some principles that are true today and that will remain true tomorrow (and in 10 years) that we should all use when it comes to investing.

Simplicity trumps complexity

Complex investment solutions will always sound more intelligent, more appealing and more intriguing. It is however important to realise that simple does not mean ‘easy’ or that it has been done with less intent. On the contrary, simplicity actually requires more thought up front because it forces you to filter out the endless noise in the markets.

Simple is often harder because people are often drawn to complexity. But complex problems don’t always require complex solutions. We all want to believe that the holy grail of investment sophistication exists and if we can only find it, all of our problems will be solved. It doesn’t.

Doing nothing is usually the best investment decision

One of the hardest things to do – especially if markets move against you and your instinct tells you that you should be doing something – is to do nothing. If you have a plan in place, doing nothing is perfectly rational investment behaviour and a firm decision in and of itself.

Time in the market matters

Time in the market is superior to trying to time the markets. A long-enough time horizon is the best hedge against most market risks.

As Daniel Kahneman once said, “The long term is not where life is lived.” As investors, we must be prepared to live through market corrections and volatility. It’s part of the game. “Long term” is made up of a range of short terms.

It’s not one-size-fits-all

Every investor is unique, with unique financial goals, time horizons, tolerances for risk, income needs, etc. The most important thing you can do is to understand your own set of unique identifiers and invest in the right type of strategy that will provide the best path towards achieving your personal goals.

Your investment journey is unique, so it doesn’t really matter what other investors are up to.

Intelligence matters less than you think

Whether an individual is good or bad at investing often has little to do with intelligence. Temperament and behaviour when it comes to investing can far outweigh intellect.

Unsuccessful investors often exhibit the same poor behaviour – trying to time the market, not saving diligently, overtrading, forecasting, being overconfident in their investment abilities, investing based on news headlines or political beliefs – and the list goes on.

Your rate of savings is more important than your investment return

At the end of the day, money can only grow if it is saved. We all want the best-performing portfolio but the reality is that performance is only one of the components on the journey to wealth creation.

While you can’t control how markets and/or your investments will perform, you can control the amount you save every month. Saving and investing are the ultimate power couple.

You have to take risks to make money

Managing risk is an important component of investments and it is important to be invested in the appropriate strategy for your personal level of risk tolerance. Unfortunately, the reality is that you can’t avoid risk altogether. Ultimately you will have to invest your money in some investment vehicle other than a bank account in order to achieve true investment growth.

Headlines won’t make you money

If investing was as easy as listening to the news and investing accordingly, everyone would be rich today. Filtering out the everyday noise and maintaining the right temperament and long-term mindset throughout your investment lifespan is far more rewarding than reacting based on the latest headlines.

In the wise words of Warren Buffett, it is often better “to be fearful when others are greedy and to be greedy only when others are fearful.”

Focus on what you know

If you find yourself confused and worried about the state of the economy, the negative headlines, your investments, or politics, remind yourself to focus on the things that you do know and can control.

Your investment journey can be a very rewarding experience if you prioritise preparation over prediction.

This article was written by Debra Slabber, Portfolio Specialist Director at Morningstar South Africa.