Episode Details

The 8 Golden Rules of Successful Investing - part 2

There are only 8 rules to successful investing according to Stuart Wemyss, my guest on this week's show.

According to Stuart, investing is as easy as winning a game of monopoly when you know the rules.

Last week I talked to Stuart about the first four rules of investing. This week we're going to continue the discussion by explaining the remaining rules.

If you haven't yet, make sure to listen to last week's episode, The 8 Golden Rules of Successful Investing - part 1.

The Golden Rules That We Discussed Last Week:

• Rule #1 Play the long game
• Rule #2 Know how much income you need and by when.
• Rule #3 Spend less than you earn and invest the difference regularly
• Rule #4 Grow your asset base first and then tilt towards income

The Golden Rules That We Discuss This Week: Golden Rule #5 Set your asset allocation to reduce risk and maximise returns

• Asset allocation is the decision where to invest: property, shares, bonds, commercial property, cash, etc.
• Asset allocation is an investor's most important decision as you cannot control markets and returns – but can control where you invest.
• My advice is to adopt a strategic long-term asset allocation and then make small tactical tilts to accommodate asset class (under/over) valuations.
• Property is lumpy so: (1) look at ex-property allocation on a year by year basis and (2) project/aim to have a more balanced asset allocation by the time you reach retirement
• Need to reduce volatility – i.e. don't lose money. If you lose 50%, you need to make 100% back.
• Volatility: Shares = 20%, bonds 7-10%, property 10%.
• Invest in negatively correlated assets e.g. shares and bonds. Property has very little correlation with shares and is negatively correlated to bonds.
• Your allocation depends on your starting point, risk profile, goals, time until retirement, etc. – I back-test various allocations in the book.
• You need professional and independent asset allocation advice.

Golden Rule #6 Invest in the share market using low-cost passive investments

• Two types of management styles: active and passive.
• Depending on the study, between 70 and 96% of active fund managers fail to beat the market over the medium to long run. The longer the period studies, the worse the results. So, picking an active fund manager that beats the market is like finding a needle in haystack, just invest in the haystack (index).
• Other benefits of a passive approach include: lower fees, less tax (turnover), more diversification.
• Indexing works because
  • Fees are low
  • It relies on a rules-based approach which is repeatable and testable; and
  • You don't have to put your faith in one index methodology. Instead, use various, robust, and proven index approaches (e.g. traditional market cap, fundamental indexing, dimensional):

• You can access low-cost index funds through Exchange Traded Funds and managed funds.
• Super: some industry funds offer indexing, BUT it is only traditional indexing – I believe you must diversify. Optimising returns and fees typically will have a greater financial impact than extra contributions – so optimise the way your super is invested and the fee you pay first.