A Few Investment Lessons I've Picked Up Over the Years

The article was published in the October 2017 issue of Morningstar FundInvestor. Download a complimentary copy of FundInvestor by visiting the website.

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I joined the picture in 2004, though I’ve been at Morningstar since 1994. The industry has grown massively, and it has changed to a better-run, more professional, and lower-cost business where leadership is more robust and less personality-driven. Here are a few of the lessons I’ve learned.

1) Build a plan for multiple investment goals and stick to it.

2) Align your investments with each goal.

3) Keep costs low, but evaluate whether some services like paying for a financial planner or tax preparer are worth the price if you don’t have the time or investing acumen to do it yourself.

4) Choose funds that are good bets to be keepers five years from now because they have depth of managers and analysts, low costs, and strong stewardship to keep them on the right path.

5) When monitoring funds, pay more attention to management (the manager, the analysts, and the fund company behind them) and costs than changes in performance.

6) Build from the core out. Make sure most of your money and attention goes to core equity and fixed-income funds. It’s easy to get excited by hot performers and exciting niche funds, but a whole portfolio of those funds is just a giant mess.

7) Be open to passive and active investing.

8) Be patient. Even the best managers will underperform in a three-year period. If the management and strategy are still strong, keep the faith.

9) Do not let the news drive your investments. Markets price in the news probably before you’ve even heard it. Even the smartest investors have difficulty making money by predicting economic trends or choosing which countries will be winners. With hindsight, we can see that the low point for the U.S. economy was the best time to buy in, even though it felt like the worst. The relationship between economics and the stock market is not as clear as most people think.

10) Don’t let the price you paid for an investment drive your decision on whether to sell. I’m amazed when people tell me they are going to hold on to a losing investment until they get back to even. If it’s a bad investment, move on. Think instead about returns. If you think one fund will return 5% a year and one in the same category will return 10%, it doesn’t make sense to wait before switching to the 10%.

11) Don’t worry about a fund’s net asset value. This relates to the story above, but I’ve also heard people interpret NAV like it is a good indicator of total return. It isn’t. Funds make distributions along the way that reduce NAV.

12) Invest automatically whether through a 401(k) or an automatic investing plan you set up yourself. The results are great because they enforce a discipline that keeps emotion out.

13) Seriously, don’t underestimate the importance of costs.