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As Warren Buffet, one of the world’s most successful investors, once said: “Our favourite holding period is forever.” In other words, don’t try to time the market by buying at the bottom and getting out at the top – there is no get-rich-quick scheme. Instead, growing wealth is about time in the market, which will give you the benefit of compounding growth on your original investment.
When it comes to building wealth, always think long term, advises ProSolution Private Clients Director and author of the forthcoming Investopoly: The 8 Rules for Mastering the Game of Building Wealth, Stuart Wemyss. “You will ultimately be an unsuccessful investor if you think short-term, be impatient or greedy,” he says.
Before you start investing, you need to have goals so that you can plan for working towards them. You first need to think about two important questions, advises Wemyss: one, how much income you need and, two, when (or at what age). Without knowing this, it’s impossible to formulate even a basic financial plan, he says. “Not starting with a goal, no matter how simple, is like jumping into your car and driving around without a destination,” he says. “Having a goal also gives you a context to make financial decisions. That is, you can ask yourself, ‘If I do X or Y, which one will get me closer to my goal?’ In the absence of a clear goal, it is very difficult to decide which option is best for you.”
The old cliché rings true – don’t put all your eggs in one basket. Your investment portfolio should be diversified across different asset classes and within each market. This will reduce your risk and maximise your returns, says Wemyss. The question is whether you should invest in property, shares, bonds, commercial property, cash or something completely different. “The answer is to develop an asset allocation that is diversified, balances out your portfolio’s volatility or risk and combines assets with negative correlations,” says Wemyss. “In simple terms, if you have a finger in every pie, you should make money no matter what the markets do.”
All successful investors have something in common: they’ve made plenty of investment mistakes. The key, according to Buffett, is to rigorously analyse those mistakes and learn from them. If you invested $500 in a stock before you knew all the facts about the company, learn that lesson and do more research next time. Or perhaps you were tempted to sell an investment quickly and subsequently missed out on a better return – use that experience to help you be more patient in future. The trick is to analyse your mistakes so you can extract wisdom from them.
While there are many wise and successful investors from whom you can learn, it’s also important to trust your own decisions, according to Buffett. In fact, the veteran says that learning to trust yourself is the hardest thing most investors will ever do. If you educate yourself properly about potential investments, he says, there’s no good reason to assume so-called experts are right and you are wrong. And, he points out, it’s the investors who make their own decisions based on research – rather than following the crowd – who often end up with the biggest rewards.