|Coming back to the simplest rule – invest and stay invested is very relevant on two counts.
First, is what we call the “cash drag” – or the investor behaviour where they obsess about seeking out 1-2% more on the small amount invested in stocks while the majority of their wealth deflates in cash.
Avoid the cash drag on all counts. It is easier to make a simple 10% on 80% equity allocation than to spend a considerable amount of time and energy trying to make 40% on a 20% equity allocation year over year. A corollary for the same is, don’t book profits if you have no clue where you will re-invest them. Selling w/o a reinvestment plan is inviting “cash drag”.
Second, one of the leading question we get from our user and from media is how should an investor invest in market highs – should it be lumpsum or STP? Our research clearly says “lumpsum” has worked better 3 out of 5 times historically, both in India and the US. But more importantly, we caution that don’t fall into the “analysis paralysis” trap. Choose one, make your investments and move on.
We may agree or disagree on which one, lumpsum or STP, is a better way to invest during market highs, but we should all collectively agree that either is better than not investing!
So, if I were to now think of the smallest list of rules of investing, it would be:
1/ Invest and stay invested. If you invest it will lead to something. It’s the people who stay invested all the time who eventually catch on to things.
2/ Invest in the simplest security to achieve your goals. For example, over an investing lifetime, a simple index fund portfolio will perform better than your stock portfolio which in turn will do better than your options portfolio etc. And this is before considering taxes and investing behaviour.