Ten Core Investing Principles for Smart Investors: Part 1

Investing wisely is not about luck—it’s about understanding and applying key investing principles that guide you toward making informed, strategic decisions. In this blog, we’ll explore the ten core investing principles and provide real-life examples to illustrate each one:  

• Principle 1: Don’t put all of your eggs in one basket
• Principle 2: If it sounds too good to be true, it probably is
• Principle 3: Urgent and only available today = wrong
• Principle 4: Follow the money
• Principle 5: Buy low and sell high
• Principle 6: The balance of risk and reward
• Principle 7: Fail to plan, plan to fail
• Principle 8: The endowment mindset
• Principle 9: Whose money is it?
• Principle 10: A fact based on an observation of one doesn’t prove anything

  Whether you’re a seasoned investor or just starting, these investing principles will help you make smarter choices and build a solid foundation for your financial future. Let’s explore these scenarios and see how they can transform your investment strategy.  

Scenario #1: John and the Lump Sum of Cash

Before diving into the investing principles, let’s look at John and Kathy’s story. John and Kathy are in their fifties and are regular people just trying to make it all work. The kids have mostly grown and gone. John is an engineer and has been in the same place for 20 years. Kathy works as an administrator for a local high school. The last few years have been good, but it’s been a real struggle mentally, physically, and financially caring for John’s mother, who has been in a care center due to dementia/memory issues. John’s mother has now passed away. After taking care of the funeral and the medical people, John has a $70,000 death benefit from his mother’s life insurance policy that he has just received. John and Kathy feel the money should be saved for their own future and want to invest it in something more than the savings account at the bank with an interest rate of less than 1%.  

Taking the Plunge

They decide to put the money in the stock market but are unsure where. John exercises each morning at a gym down the street and is interested when he hears two guys in the locker room (both of which drive nicer cars than his) talking about a stock’s success from a technology company that’s grown more than 20% this year alone.  Later, while driving to work, he’s surprised to hear the finance analyst on the morning news show that he listens to profiling that same stock and highlighting how well it has done. The company has done better than forecasts, and analysts thought it would. The company is genuinely at the top of their game. John and Kathy discuss what he’s learned and decide to purchase that stock. He opens an online trading account and moves the money into that stock. John was careful to make sure that he used a no-fee or low-fee service and purchased the stock directly.  

The Ups and Downs of Stock Investments

The following month, the stock continued its incredible journey. John and Kathy made 5% on their investment in the very first month! The following month was a different story. A few things had changed on the global stage, and there now seemed to be a trade policy problem that stopped the firm’s expansion. Quarterly growth targets were missed, and the stock dropped 10% from the prior month’s position. That change was hard for John and Kathy, but they recognized that stocks go up and down – they would just watch and see how the next few months panned out. The following month, a news article called out some ethical concerns about the technology company and stated that the COO was being investigated for falsifying some records. The market change was immediate – the stock dropped 15% in a single day. John has had the stock for less than 90 days but has lost significant value. After thinking about it carefully, he decides that he’s made a poor decision and would be better off getting out of the stock than seeing it drop further. He sells the stock at a 20% loss from his original investment. Kathy mentioned that people at her work had been discussing a packaging company that was doing really well and is forecast to double in size over the next three years. John and Kathy moved their now significantly smaller cash pool to the new packaging stock and hoped for the best. Did John and Kathy break any of the ten principles?  

Scenario #2: Jan and the Annuity

Jan just turned 68 this year and is glad the new year brings the potential of better days. Her husband died last June, and gratefully, he did have a life insurance policy of $250,000. After burial expenses and some medical bills, she had $200,000 left. One evening, her responsible grandson visited with an excellent business idea he wanted her help with. Before the evening was over, Jan wrote him a $15,000 check and hoped he would pay her back when the business was successful. A month later, Jan found that the grandson had used her money for a newer truck and decided not to pursue the business at all. Jan was very angry about what happened and wanted to ensure that it didn’t ever happen again, but she didn’t know what to do about it.  

Annuity as a Safe Haven?

Later that week, she received a phone call from the same insurance company that had her husband’s life insurance policy. The person on the line recommended she put the money she had left in an annuity. Doing so would prevent her family from accessing the money; it would give her a guaranteed rate of return, and continue to pay a monthly amount until she died. This sounded good and risk-free, so she put the remaining $185,000 into the annuity.  

A Sudden Need for Funds

Jan slipped on spilled water on the kitchen floor two months later and fell hard. When she tried to stand, the pain shooting through her back and leg told her that something was very wrong. Jan found that she had broken her hip. The surgery went well, but the recovery was very slow, and her balance was never the same. The in-home nurse told her that she needed a ramp-based sidewalk installed at the back door and to fill the ‘step down’ floor in the living room.  The cost for these things was going to be $20,000. Jan thought she’d have to take the funds out of the annuity. When she called to do that, she was advised that she couldn’t do it without canceling and rewriting the policy, and there would be a 10% cancellation fee in the first year. She would lose $18,500 of her funds in addition to the $20,000 she needed for the alterations to her home. What can we learn about Jan’s experience? Keep reading for our ten core investing principles to find out!  

Scenario #3: Beth and Her Father’s Land

Beth was surprised when the attorney called her. She and her sisters had heard once that her parents had some kind of property in the southern part of the state, but no one had ever been able to validate anything. Now she learned that there was a run-down house with some acreage attached to it, but the land had a conflicted title with descriptions that crossed into some federal land. The attorney advised that instructions from her father had been given to him to resolve the title dispute, sell the land, and distribute the proceeds to the daughters. He had done that and was now routing her share to whatever bank account she directed. The sum coming was surprising to her—$200,000. That was more money than she had ever had access to. Beth put the funds in a savings account and wanted to be careful about what she did with them.  

A Tempting Opportunity

At a family gathering later in the week, Beth was approached by an uncle who asked if her dad’s ‘mining’ property had ever been sold. Beth told him there was a property, but she knew nothing about a mine. The uncle seemed to know all about it and advised that the purpose of the land was to support a gold mine that Dad and a friend had been working on. They later discovered that the land buyer was a friend who wanted to protect the work they had done to date. The uncle was also involved as the friend had allowed him to buy in via some ownership shares – taking a portion of the father’s ownership. The same opportunity was available to Beth. For the $200,000, she could buy her father’s remaining shares from the friend and own about 15% of the gold mine. Beth liked the thought of continuing her father’s efforts even though she knew nothing about mining or how to gauge its value. She arranged to purchase the shares from her father’s friend at her uncle’s recommendation. She was now the owner of a gold mine, at least part of it anyway.  

The Harsh Reality

Six months later, Beth needed to replace a barn at her property and needed $40,000 to do it. When she tried to sell the shares of her mine, she found that nearly impossible. There was no open market, the mine wasn’t actively producing yet, and the only possible buyers were the dad’s friend and the uncle—neither of whom had any cash to buy the shares with. Unfortunately, from any practical perspective, her $200,000 inheritance was simply gone. These real-life scenarios illustrate the importance of wise investing principles. From diversification to avoiding too-good-to-be-true offers and evaluating liquidity, each story underscores the need for informed decision-making. As we explore the ten core principles of smart investing, remember these examples to help avoid common pitfalls and achieve financial security.  

10 Core Investing Principles

From the timeless wisdom of not putting all your eggs in one basket to the strategic approach of buying low and selling high, these investing principles will equip you with the knowledge to navigate the complexities of the investment world:  

Principle #1: Don’t Put All Your Eggs in One Basket

The practical origin of this eggs in a basket phrase comes from the common sense wisdom of placing eggs gathered from the chicken hutch in more than one basket so that if you were to fall in the process – not all of the eggs would be damaged. In the investment world, we call this principle “diversification.” However, When managing your money, the principle is broader than just the basket the eggs are in. The egg in this example is money. The basket is the type of asset in which the money is placed. Asset types include stocks, mutual funds, ETFs, real estate, bonds, and alternatives. Beyond these asset types, the industry, geography, and investment time horizon must be given additional consideration.  

Principle #2: If it Sounds Too Good to be True, it Probably is

We all like a great deal, and there is something a little twistedly pleasing to feel like you got a better deal than anybody else. The reality, though, especially in the finance world and when thinking about your money, is that – too good to be true is too good to be true. Thinking about the three scenarios we previously shared, each person dedicated all they had to a single investment type, and each did so because they felt like it was a deal they couldn’t pass up. Sound investing and good planning take time and thoughtful review.  

Principle #3: Urgent and Only Available Today = Wrong.

We live in a world with a 24-hour news cycle and instant on-demand access to nearly everything. With that kind of access, businesses feed on that mindset by creating an impression of scarcity, such as ‘You must act now’ or ‘only available for a limited time.’ That kind of emotion should never be the driver in your investment decisions. Good investment planning is focused on longer-term growth and income strategies. Folks who promise excellent returns or an incredible deal but require you to act today are on a quick path to nowhere. Good investments don’t go ‘on sale.’  

Principle #4: Follow the Money

Principle number 4 is all about separating emotion and hype from reality. Individual motivations reveal much about who a person is and why they do what they do. In the world of finance and investment, there is no free lunch. Every action taken by someone in the investment space is designed to drive a specific activity that will result in some benefit. Understanding motivations can help prospective investors or clients make better decisions. One of the best ways to do that is to “follow the money.” How is the person getting paid? What are they getting paid for? Whose interests do they represent? Why are they compensated for what they do? In the world of finance, there are employees, analysts, planners, agents, brokers and advisors. Let’s walk through each of these to help build your understanding:  

Employees

These individuals are salaried people paid by a specific company to represent their products. They try to please their prospective clients as best they can with the products that they are allowed to offer. In addition to their salary, they are sometimes paid a commission for selling and placing a particular product.

Analysts

These people advise in the form of opinions. Usually, they do so for businesses, but sometimes, they provide views for news outlets or publications. They typically have advanced education and often hold a designation like CFA or ChFA. A product, industry, or a particular firm frequently sponsors them. They are paid for their opinions and analyses. It would be essential to know who is paying for that opinion.

Planners

These people hold advanced planning certifications often designated by the letters CFP or advanced business and finance education with designations like MBA. A planner can be compensated in various ways, but in their purest form, they work a lot like an attorney billing for an initial package of services and then charging an hourly rate for their time. Their goal is to help you and to bill for that time. They may or may not do any investing for you as their primary focus is understanding your situation and developing a financial plan based on that. Every interaction with them impacts their time, which they would bill you for. That is their living.

Agents

Sometimes, agents sell financial products or insurance products from an economic angle. Agents are paid from commissions earned from the products that they place. An agent is a representative of a company. Most annuity products are sold by agents. An agency is an outlet of a company. Although these people are independent contractors, their structure as agents is to represent the interests and objectives of the firm for which they are agents. They strive to help their customers and prospects as best they can within the framework of the products they have to offer.

Brokers

These are similar to agents in that they represent the interests of the brokerage (the firm they work for), and the brokerage represents the interests of the financial products firm. They are paid on commission from the financial products they place with clients. They strive to help their customers and prospects as best they can within the framework of the products they have to offer.

Advisors

These individuals also have advanced education and certifications like CFA, CFP, or MBA. However, they represent you and your interests and are generally paid a fee based on the amount of money they manage on your behalf. They have access to the entire market and are not bound by investment type or company. They do not normally accept commissions, charge hourly fees, or work for or represent a financial product or firm. The fees paid to them commit them as fiduciaries to you, representing your interests, needs, and objectives.   One of the challenges in the finance and investment world is that a single investment professional can be all of these things at once. As an investor, you want to make sure what hat is being worn. The person’s core philosophy matters and should be something you ask about. As for me, I am an advisor. I don’t take commissions; instead, I charge a fee against the funds I manage on your behalf. My focus is solely on my clients, always representing their interests. Writing these posts stems from my belief that education is a core part of my practice, aimed at helping people make better decisions. Over time, I hope to earn your trust and potentially assist you in the future.  

Principle #5: Buy Low and Sell High

This principle is one of the most commonly quoted phrases whenever a person is asked how they can do well with investments, but it is clear that most people don’t actually understand what it means. Sure, we all get the basic premise that you want to sell something for more than you purchased it for, but the steps to do that are counterintuitive. The critical piece is the ‘buy low’ part. Just like our example in scenario #1, John purchased some stock based on a tip that a particular stock was doing really well. John did the opposite of principle #5, buying when the stock was high. You see, the key is not buying when the investment is doing well; it’s buying when the investment has a good position to do well in the future. You desire to get into the investment when it is not doing well yet but will likely do well in the time frame required by your investment plan. To follow principle #5, you must be mindful of your desired outcome time horizon and then watch the trends that will make that happen.  

Sue’s Story

Let me give you an example. Sue has a portfolio of investments. She has 5,000 in cash that she wants to place in high-growth stock (buy low / sell high). Her desired exit or withdrawal of this money is five years. Sue then looks for industries and companies likely to grow in a five-year window. Thinking of today’s environment, let’s identify the trends that are occurring or will occur in that time frame. Here are the things that Sue thinks about. Brick-and-mortar stores will continue to struggle (perhaps don’t invest in retail or real estate associated with malls). More people will continue to shop online (maybe invest in shipping companies or things that feed that environment, like cardboard box companies and people that build tape or packaging); the world is in a lot of chaos with lots of unrest (perhaps review companies and technologies associated with the military and space), lots of people are retiring, and they like to travel when they can (maybe look into hotels, travel companies, luggage companies, and airlines). You see the pattern. You want to buy into blossoming things that will reach their peak when you need to withdraw the cash. Buy low and sell high—it’s a foundational principle.  

Key Takeaways

As we conclude Part 1 of our series on the ten core principles of smart investing, we hope these first five investing principles have provided you with valuable insights to enhance your investment strategy. But we’re only halfway through our journey! In Part 2, we’ll explore the remaining five investing principles, including balancing risk and reward, the importance of planning, adopting an endowment mindset, understanding the true ownership of your investments, and critically evaluating seemingly factual observations. Stay tuned for Part 2, where we’ll continue to build your knowledge and confidence in making informed investment decisions. If you need personalized guidance or have questions about investing principles, our expert financial advisors are here to help. Contact us today to start your journey towards smart investing!