Seven pieces of advice for the patient investor

WealthWisdom® from one of our most respected resources: Prof Jeremy Siegel of Wharton.

Most corrections do not become crashes, and (here’s the key…) every single one of them turned out to have been great buying opportunities in the fullness of time.

We have never been fans of investment shows like CNBC’s Mad Money and Fast Money, where the tips come hard and fast in a loud voice with lots of gestures and the phrase ‘long-term’ seems to imply something that might last until the end of the week. In fact RVW’s approach is the polar opposite: Strategic, thoughtful and purposeful. These shows are a form of theatre — investment advice as entertainment.

Among the books that stand the test of time is Stocks for the Long Run, written by Jeremy Siegel, a finance professor at the University of Pennsylvania’s Wharton School of Business. It was first published 20 years ago and remains a classic. The 5th Edition was just released.

Siegel argues that the stock market is the best place to put your money despite its risk, volatility and unpredictability. He reviewed 200 years of data and found that U.S. shares have returned 6.5 per cent to 7.5 per cent a year,after inflation, throughout that period.

Within that there are huge fluctuations — like the 2008 crash — so the longer your horizon, the better.

Here are his seven best pieces of advice:

1. Be realistic: If stocks have returned between 6 and 7 per cent after inflation over the last 200 years, you can’t consistently expect more. In the current environment, probably less.

2. Think long term: Returns are more stable the farther out you go, because they smooth out short term fluctuations.

3. Buy low-cost index funds: If you’re not confident in your ability to choose stocks, buy an index. By matching the market year after year, you’ll be near the top of the pack when long term returns are tallied. Indexes, such as the S&P 500 “have outperformed nearly two out of three mutual funds since 1971,” he says.

4. Go international: Put a third of your savings outside North America, including emerging markets, “a must in today’s global economy.”

5. Look for dividends: Stocks with lower price to earnings ratios and higher dividend yields have superior returns and lower risks than so-called growth stocks.

6. Stick to the plan: Set rules to keep your portfolio on track especially if you find yourself giving in to emotion. Most investors who trade frequently have poor returns.

7. Be average: Don’t try and beat the market. You can’t. “Many dream of buying the next corporate giant in its infancy. But the evidence is overwhelming that investors seeking these winners suffer poor returns.”

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