Being a Foolish investor is simple, but not easy. That’s partly due to the discipline it takes to firstly live within your means. Almost everyone would rather live in the moment and buy a more expensive car, go on the very best holidays and spend the evenings and weekends socialising at the best places in town. However, the reality is that living week-to-week will not improve your long term financial future.
That’s why living within your means is a key part of being a Fool. This doesn’t mean scraping by every week, eating the minimum number of calories from the cheapest food, not heating the house and staying in every night. However, it does mean spending only a part of your disposable income now in order to enjoy the moment, but to also keep an eye on the long term through saving.
Of course, merely saving money is unlikely to equate to significant wealth further down the line. The returns on cash tend to be relatively low – especially at a time when many central banks have adopted ultra-loose monetary policies. Combined with inflation, this means that the real return on cash balances is likely to be only slightly positive. Therefore, investing your savings in the stock market is likely to be a much better idea and is a key part of being a Fool.
Perhaps the most important idea behind investing Foolishly is to not follow other investors. This may sound counterintuitive at first, since many investors are experienced and knowledgeable. However, history shows us that even the smartest of investors suffer from being overly emotional during severe booms and busts. In other words, at the key moments in an economic cycle, they ignore the facts and instead rely on emotions to rule their decision-making.
This creates severe recessions such as the credit crunch and also major booms such as the tech bubble. They provide opportunities for Foolish investors to buy low and sell high. Ignoring emotion and focusing on facts such as the financial strength of a company, its management’s experience and valuation will help you to invest better.
Similarly, diversifying among a number of different stocks and sectors will boost your return and lower risk. Certainly, life would be great if we could all pick one stock which went on to be the best performing company in history. However, the reality that even the very best investors make mistakes and so it is crucial to spread the risk among a number of stocks and sectors. Not only will this reduce company specific risks, it will provide access to a range of industries which may perform well at different points in the economic cycle.
Clearly, living like a Fool will not always be easy. Thinking long term, living within your means, investing for the future and diversifying may not come naturally to many people. However, by adopting those strategies in your everyday life, it is possible to take control of your finances and give yourself a brighter financial future.