Long-term investment: These 7 principles are (very) important to us!

For a successful, long-term investment, you need a reliable compass. We are convinced of this. In this article, you’ll find out which 7 principles we follow to the letter – and where we don’t take it so seriously.  

Long-term investment: what we mean by a principle

For us, a principle is a guiding principle on which our actions and behavior are based. Principles are lean, provide orientation and can also be applied in the event of changes and surprises.

In other words, a successful, long-term investment is not based on fast-moving trends and fashions, but on a lasting foundation in the form of smart principles. We adhere to these principles in all economic and stock market situations.

Why are we doing this? Well, we are simply convinced that following a few principles contributes significantly to successful investing.

Below we explain our seven principles and explain why it is worth following them consistently.

Principle no. 1: Start investing early

Your long-term investment benefits twice over with this principle:

• The earlier you start investing, the longer your investment horizon can be, allowing you to benefit from the immense power of compound interest.
• With every investment you make, you build up your financial expertise and benefit from a growing wealth of experience. Of course, you will inevitably make investment mistakes – the sooner the better!

Of course, your hard-earned savings should not be invested lightly. Serious preparation and a well thought-out plan are of course important. But after a few months of analysis & co. at the latest, the time is ripe to “jump”. For many, however, the opposite happens: they hesitate and procrastinate – and often literally put financial matters on the back burner for years.

However, your money is constantly losing value in your savings account: the meagre interest cannot usually make up for inflation. And even if there are real gains on the bottom line, these are so modest that a noticeable compound interest effect is out of the question.

So what exactly do you need to do? Put together an asset allocation that matches your risk profile and invest in your first ETF. (You can find out how to do this in the following principles).

Principle no. 2: Pay yourself first

Once you have mastered your first investment, you should definitely keep at it. And that’s exactly what this principle is all about.

In concrete terms: As soon as the salary has arrived in the account, a fixed amount is transferred by standing order to the broker, robo-advisor and/or other investment platforms (e.g. pension 3a, P2P, collectibles) of your choice and invested in a return-oriented manner.

The statement behind this principle is clear: investments first! This means that if you have nothing left over at the end of the month, you simply cut back on consumption and let your wealth continue to grow month after month, regardless of the whims of your spending discipline.

Principle no. 3: Invest passively

The central question here is whether you pursue an active or passive investment approach. Our portfolios are consistently passive: no stock picking and no market timing.

Our “home base” (core) for long-term investments is equities. For this asset class, passive means index-based investing. This is simple and inexpensive. The former saves you time, the latter money.

For us, however, passive investing also means science-based investing. Numerous studies have shown that the passive approach is the more promising one.

Thanks to the ingenious ETF investment vehicle, implementing a passive investment approach for long-term investing is child’s play: you can invest in over a thousand companies worldwide with just one ETF. In our article “Buying an ETF: it’s that easy!” and in the accompanying video below, we show you how you can invest in an ETF with just a few clicks.

If you want to do without manual trades and make things even more convenient, simply set your portfolio to autopilot mode. How does that work? It’s quite simple. Choose a low-cost robo-advisor, tell it your risk profile and regularly feed it with money via a standing order. That’s it.

Instead of manual trades, the Robo-Advisor automatically invests according to your specifications. There’s no easier way to implement the savings plan idea! (see also our recommendation page or our article “Robo-Advisor Switzerland: 3 providers compared”)

Principle no. 4: Diversify your long-term investment

Diversified investing means not only considering different asset classes such as equities and real estate, but also diversifying broadly within an asset class.

As already mentioned, our preferred and by far largest asset class is equities. We prefer ETFs based on indices to individual stocks. In turn, we prefer global or regional indices to country-specific indices. So “MSCI World” beats “SMI”.

With a well-diversified portfolio, you rule out a total loss (as with individual securities). You also achieve a better risk/return ratio. Or as Harry Markowitz, Nobel Prize winner and inventor of modern portfolio theory, put it: diversification is the only “free lunch” in investing.

It is important that you document your preferred asset diversification before investing. This asset allocation gives you the target values for each asset class and protects your long-term investment from ill-considered actions. You can find out more about this in our articles “Diversification: Don’t put all your eggs in the same basket” and “Asset allocation: The nuts and bolts of your investment”.

Principle no. 5: Understand your investments

Based on the aforementioned investment concept in the form of an asset allocation documented in writing, it is now a matter of filling the target values with life. This means making a product selection .

Only when you have a crystal-clear understanding of the most important features of your future investment, how it works and what risks are involved should you even think about investing (see, for example, our article “ETFs: What you should look out for when choosing”).

Principle no. 6: Pay attention to the costs

A passive investment approach is already significantly cheaper per se than an active one. And yet: even with passive investing, there are two relevant cost factors that unnecessarily affect your long-term investment and the corresponding return: Broker and product fees.

So opt for a low-cost broker and keep product costs low by choosing low-cost ETFs that are established on the market (see also our article “Best ETFsSwitzerland and globally: And the winner is…”).

On the positive side, both brokers and ETFs are now also available to Swiss investors at very attractive prices.

Principle no. 7: Invest based on rules

To a certain extent, this principle summarizes the previous ones. We are all emotional beings and are prone to snap decisions and overactivity. However, you should definitely avoid acting haphazardly on the stock market, because it damages your returns.

The solution: specify your principles with rules. This will give your principles a concrete framework for implementation and avoid costly mistakes. Your long-term investment will thank you for it!

For a better understanding, we have assigned possible rules to each of the principles described above. These rules are examples and should be adapted to your individual needs.

• Rule on principle no. 1 “Start investing early”:
  “I will have invested in my first equity ETF by the end of the month. My investment horizon is at least 10 years.”
• Rule on principle no. 2 “Pay yourself first”:
  “On the 1st of every month, I invest X amount by standing order in my securities portfolios with my online broker (or robo-advisor) and in my pillar 3a private pension.”
• Rule on principle no. 3 “Invest passively”:
  “In the equities asset class, I invest exclusively in passive ETFs and avoid individual stocks (total loss risk) or active portfolio management (high costs).”
• Rule on principle no. 4 “Diversify your long-term investment”:
  “I consistently adhere to the target values of my asset allocation. This defines the proportions of my low-risk and risky investments (level 1), the proportions of the various asset classes (level 2) and, in the case of equities, the regional weighting (level 3). A Rebalancing I do this once a year.”
• Rule on principle no. 5 “Understand your investments”:
  “Before I invest in an investment product, I research it thoroughly so that I have a good understanding of its characteristics, how it works and the risks involved. My equity ETFs must UCITS-compliant, have a fund volume of at least CHF 200 million and be physically replicating.”
• Rule on principle no. 6 “Pay attention to the costs”:
  “I only accept financial providers (e.g. brokers or robo-advisors) with low fees. I also keep the product costs (TER) as low as possible. The cumulative total costs for platform operators and products (e.g. ETFs) must not exceed 0.5% of the risky portfolio value on average.”

Long-term investment: where our portfolios differ

Even though these seven principles are “sacred” to us, Toni and Stefan, this does not mean that our portfolios are identical.

On the contrary: our long-term investments are characterized by great diversity and different approaches when it comes to their specific structure. Particularly in the following five aspects:

• Plant (classes): Choice, weighting
• Geographical breakdown: global vs. regional equity ETFs (Europe, Asia-Pacific, etc.)
• Dividends: distributing vs. accumulating
• Sustainability: ESG vs. conventional
• Source of funds: equity vs. credit leverage

In contrast to our seven principles, we do not consider these different characteristics of our portfolios to be decisive for our investment success. They simply represent our individual preferences for long-term investments.

What principles are important to you when investing? We look forward to your opinion!

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Disclaimer

Disclaimer: Investing involves risks. You must decide for yourself whether or not you want to take these risks.

Errors excepted: We have written this article on long-term investments to the best of our knowledge and belief. Our aim is to provide you as a private investor with the most objective and meaningful financial information possible. However, should we have made any errors, forgotten important aspects and/or no longer have up-to-date information, we would be grateful if you could let us know.