《the elements of investing》 is a classic investing book written by charles ellis and burton malkiel. with rich practical experience and profound theoretical foundation, the two authors summarized the key principles that individual investors should follow when building investment portfolios. these principles cover various aspects of investing, including defining investment objectives, asset allocation, investment options, risk management, costs control, etc. the book has been well received since its debut, and many consider it an investing bible especially suitable for novice investors. in an easy-to-understand manner, the book elaborates the essentials of investing around the core elements, enabling readers to grasp key concepts of investing, avoid common mistakes, and build portfolios that can generate long-term stable returns.
set reasonable investment objectives based on life cycle
the first principle of investing outlined in the elements of investing is to set reasonable investment objectives based on one’s current life cycle stage. young investors can afford to take more risks and invest more aggressively for higher returns; as one ages and has more financial responsibilities, the investment portfolio should become more conservative to preserve capital. therefore, the authors suggest investors take life cycle factors into consideration and set investment goals accordingly when constructing portfolios.
maintain proper asset allocation
asset allocation, deciding how much to invest in stocks versus bonds and cash, is regarded as the most important investment decision. the elements of investing stresses the importance of maintaining proper asset allocation to balance risks and returns. history shows that stocks outperform bonds and cash in the long run but with higher risks in the short term. based on risk appetite, investors should determine allocation to stocks versus safer assets to build portfolios resilient to market turbulence.
choose low-cost and diversified investment vehicles
the book advocates choosing low-cost, tax-efficient and highly-diversified investment instruments, such as index mutual funds and ETFs. such instruments provide easy access to the market at minimal costs while avoiding individual stock risks. the power of compounding makes minimizing costs critical for long-term returns. and broad diversification reduces volatility without sacrificing returns.
manage risks via asset allocation and diversification
according to the authors, proper asset allocation and diversification are the most effective ways to manage portfolio risks. allocating assets across different classes balances risks and returns. diversifying within each asset class eliminates individual security risks. such portfolio construction creates durable portfolios to withstand market turmoil and deliver stable long-term performance.
maintain discipline and perspective
finally, the book emphasizes the importance of discipline and perspective in investing. investors should stick to the plan, remain patient and not be distracted by short-term market moves. bear markets are inevitable but temporary setbacks for long-term wealth accumulation. by maintaining discipline and perspective, investors can ignore market noise, focus on long-term goals and ultimately investment success.
in summary, the elements of investing provides a framework of essential principles for individual investors to follow when constructing investment portfolios. by putting these principles into practice, investors can build resilient portfolios, achieve long-term stable returns, and accumulate wealth steadily over time.