Three timeless personal finance and investing concepts

When it comes to investing and personal finance, there are a lot of sayings and rules of thumb that are out there. Some of these can be great guideposts while others may be less helpful. We wanted to highlight three common phrases/concepts that we view as timeless in the investing and personal finance world.

Don't Put All Your Eggs In One Basket

This saying refers to the concept of diversification. In short, the idea is to not make your portfolio a bet on a single stock, sector, or factor. An investor typically wants a range of different assets that tend to move in different ways at different times. At some point in time, almost every stock, sector, or market will have a stint of poor performance. Diversifying and holding ‘eggs’ in other places helps limit this risk both financially and psychologically and allows other areas to pick up the slack in a portfolio.

How many ‘eggs in a basket’ are enough to get the benefits of diversification is up to some debate as well as what one finds comfortable from a personal level but most resources tend to fall in the range of 15 to 30 stocks in a portfolio as the point where the benefits of diversification begin to decline. Regardless of the ‘right’ number, most would agree to not put all of your eggs in one basket.

Time In The Market, Not Timing The Market

This saying is an important one and might sound simple but can be hard to adhere to in our world that caters to short attention spans and FOMO. The whole idea behind it is simply to think long-term and stay invested in the markets, because over pretty much all of history in North America, markets have tended to ‘go up’ over time. You can see for yourself by pulling up a chart of the S&P 500 and zooming out. So, this saying is a great reminder of this fact, and also speaks to the power of compounding over time. An annual return might look small to begin with, but when that number is compounded for over 30 years, the math of time in the market really starts to work in an investors favour. 

The other area that this speaks to is avoiding ‘frictions’ such as taxes, transactions costs and opportunity costs such as selling but then missing the next bull market. The more an investor tries to time the market, the more likely they are to add extra, unnecessary costs, make mistakes, and disrupt the power of compounding. 

It's Not About What You Make, But What You Save

This saying falls more squarely in the ‘personal finance’ category but is an important one. Saving and investing are two side of the same coin. It is hard to do one without the other and one can make up for lacking in the other. As an example, if you fall on a tough year in the savings department, the investment side is potentially there to fill in any gaps. Conversely, in a bad market year, the savings being put to work have a better chance of offering better returns going forward, as lower markets mean cheaper stocks and in theory better long-term returns. So, the two aspects have a bit of a positive feedback loop with one another. The more you save, the more you can invest and the more those investments will compound over time. Then, the less you will hopefully have to save down the road when it becomes ‘crunch time’. 

This saying is also a helpful reminder that yes, ‘making more’ certainly makes the whole saving and investing piece easier, but being budget conscious and keeping one’s expenses in check can help to be an equalizer. With a bit of success through investing and compounding over time, being cognizant of what you are saving can even be the piece that makes all the difference down the road.

These are three of what we consider to be timeless personal finance concepts and ones that we think will continue to be relevant for years and years to come. 

The CMS Team