English version of
【Summary】
- Always invest with excess cash.
- Don’t exit the market: The most important thing when you invest!
- Develop and adhere to the investment principles based on your target returns and risk tolerance.
- Without an investment principle, you would be at the mercy of the market and tend to make irrational decisions (The possibility of being forced to exit the market increases).
People with no investment experience often ask me, “What should I buy now (what should I buy to make a profit?'').
Since no one can predict the future, I cannot say what you should buy, however I would like to tell you the following three points as important to minimize investment failures. I know these are cliches!
- Invest with excess cash
- Put time on your side (long-term investment)
- Make sure your investment objectives and risk tolerance before an investment, then set up an investment principle (and adhere to it)
① Invest with excess cash (Don’t exit the market)
No one can predict the future even though you can “statistically” increase the probability of winning through economic and corporate analysis.
No matter how much you improve the accuracy of prediction, it doesn’t guarantee your future profits.
Therefore, you need enough cash to stay in the market until the probability converges to the expected result (*).
*Unless the premise of the investment has changed
You should not invest with money which would force you to buy or sell, such as the initial deposits you will pay next year, or the funds you will need for your child's education in two or three years.
*Some exceptions such as risk-free assets.
② Put time on your side (long-term investment, utilizing the effect of “compound interest”)
- Greatly benefit from the "compound interest effect" by reinvesting dividends and interest earned from investment assets.
- The longer the holding period, the less fluctuation of the price. So for a long-term investment, you can expect relatively stable returns.
- Low transaction costs as the number of transactions is small.
- Good compatibility with reserve investment such as dollar-cost averaging.
*Although there is no clear definition, we assume that a period of 10 years or more is considered a "long-term investment."
In order to invest for the long term, it is important to invest with the "extra funds" as mentioned in ① above.
③ Establishing an investment principle (Based on investment objectives, expected returns, and acceptable risks)
Just like in business management, without clear objectives to pursue, you cannot choose the appropriate means (strategy) to achieve them, let along, decide what asset class (*) you should invest in.
*Asset class: A group of assets with similar return and risk characteristics
By clarifying your investment goals; ⓐ what you are investing for and ⓑ by when you target to achieve, you can decide on your target return (annual rate).
In addition, by knowing your own risk tolerance (*), you can verify whether the objectives, period, and target return set above are realistic, and based on that verification, you can finally decide which asset class to invest in.
Despite the large discrepancy between your originally envisioned goals and the current situation, if you find it unrealistic to take sufficient risks (*) to achieve your goals set up above, you will need to adjust your course to a more realistic goal.
*Risk / risk tolerance
Risk refers to the fluctuation range (image of price movement) of income (return), and risk tolerance refers to the amount of loss (risk) that occurs with asset management.
It refers to the degree a) to which something is acceptable or b) to what extent it can be tolerated.
It varies depending on age, annual income, family structure, asset size, etc.
(As a general rule, for higher return, you should take higher risk; for lower return, you should take lower risk.)
Before actually investing, having clear objectives and an image of price movements (risk) in your mind will help you avoid cutting your loss or taking profits at the wrong time.
It also helps avoid investing in financial fraud seeking unrealistic returns.
Once again, I would like to reiterate “in order to avoid losing hard in an investment, it’s crucial to continue investing according to the rules you have set in advance, despite the price fluctuations of your investment assets and stay in the market.
