The Foundations of Successful Investing

Establishing a successful investment portfolio can be likened to building a home.

The most destructive yet unpredictable risk to the structure of your home is the weather.

Even with advances in modern technology, we are still unable to accurately predict the weather with certainty.

Likewise, it is foolish to think we can successfully predict movements in the global economic climate.

Like the weather, it can be the most unpredictable and destructive threat to your investment earnings.

But with a carefully constructed portfolio built on solid foundations, you have a much better chance of weathering a financial storm.

Investment principles

The foundations of a strong portfolio rely on four key ‘pillars’ or investment principles... quality, value, diversity, and time.

We are probably all tiring of the old line, "don’t put all your eggs into one basket" - meaning to diversify your portfolio - but that is only one pillar on which to rely.

The other three are equally important. Forget about just one and you are setting yourself up for a collapse.

Let us briefly explain why all four pillars are crucial to your investing success...

If we consider the first two pillars, quality and value, it’s obvious we should look for assets that are expected to provide higher returns relative to their risks.

Applying this to shares, quality companies are those with a sound basis to their operations and future growth; that is, their earnings are not driven by fads.

This, however, might mean they take time to deliver. Remember that investing in the share market is generally a long-term strategy.

Quality and Value don’t always go hand in hand.

Quality stocks may trade at such high prices that they offer low initial value or it could be that expectations for these companies are sometimes too high. The key here is quality... the expectation is that they will be around for a long time, not just the good times.

Quality is about buying the right investments; Value is about buying those companies for the right price.

To tie this in with our building metaphor, bricks make better building materials than sticks or straw, but if you pay too much for your bricks, you may find your house not worth as much as you spent on it in a few years time.

This takes us back to diversity.

Diversity acts like the scales in a portfolio, providing balance.

True diversity in a portfolio gives the investor the opportunity to take advantage of "hot stocks" or asset classes, by balancing out the risk with quality stocks and asset classes.

It can provide a buffer against mistakes in assessing value because nobody gets it right all of the time. A well-balanced portfolio should be designed to cope with occasional losses.

And finally, the pillar of time, (matching your timeframe to your goals), gives you the best chance of success.

Every market will suffer periodic downturns, however, over time the upturn has historically triumphed.

The golden rule is don’t panic and don’t get caught up in the fear and greed cycle.

Make sure your investment portfolio is built on solid foundations.

Talk to an RSM financial adviser today or visit your nearest RSM office. 

Note: past performance is not an indicator of future results.

This article has been prepared by RSM Financial Services Australia Pty Ltd ABN 22 009 176 354, AFS Licence No. 238282.

As everyone's circumstances are different and this article doesn't take into account your personal situation, it is important that you consider the above in light of your financial situation, needs and objectives, and seek financial advice before implementing a strategy.

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