Friday, 19 December 2008

Four investment variables that are controllable

The Wisdom of Asset Allocation

"God grant me the serenity to accept the things I cannot change, courage to change the things I can, and the wisdom to know the difference." Reinhold Niebuhr (1892-1971)

Those words underscore the foundation of prudent investing. There are things we can control and there are things we can not. Knowing the difference is imperative and "the wisdom" lies in the application of that knowledge...

Among the primary variables of investing, the investor may control:
(1) the amount to be invested;
(2) the allocation of the assets;
(3) the holding period or time in the market; and
(4) the timing of the investment.

Where investors make their biggest mistake is focusing intently on trying to control the one investment variable that is uncontrollable --
(5) the outcome of the investment (amount of gain/loss)...

Although most investors understand that the vast majority do not beat the market averages, especially over long periods of time, it is in our fallible human nature to believe that we will be among the "above average." Whether one ascribes to Jack Bogle's rantings on Lake Wobegone, where everyone is above average, or to the validity of the Efficient Market Hypothesis (EMH) or not, it is difficult to argue against the evidence that the greatest advantages to be gained by the investor is within a combination of the four investment variables that are controllable.

Read further:

No comments: