Financial advice provider Stanford Brown has released its own guide on “The Ten Golden Rules of Investment”.

According to the company, the traditional financial planning model states a number of “incontrovertible truths”, with these truths including: “Markets are efficient and can’t be predicted; bubbles don’t exist; equities always outperform in the long run; past returns are an excellent guide to the future; and [that] it’s all about ‘time in the market, not timing the market’.”

Instead, Stanford Brown counters such a model with its own belief that “past returns are often a terrible guide to the future; that bubbles regularly form; that the madness of crowds is endemic; that predicting short-term returns is strictly for fraudsters and economists; and knowing what your mates at the club have done can really hurt your returns”.

To help clear the air, the financial advice group has offered up its own “golden rules of investment”, which we’ve outlined below.

1. History doesn’t repeat itself – but it does rhyme

Stanford Brown has noted the “remarkable” similarity of the equity cycle after the Great Depression of the 1930s, the oil shock of the 1970s and the market crash of 1987. 

“Markets are the collective actions of humans, who nearly always respond in the same way,” it was outlined.

“The cycle reaches its zenith with predictable delusional euphoria that ‘this time it’s different’, followed swiftly by denial, capitulation and despair.”

This time it’s not different, said Stanford Brown, who explained that “our behavioural biases always conspire against our investment success”.

“If something can’t go on forever, it will stop.”

2. Keep things as simple as possible… but not too simple

The future return on any asset class is the sum of three different factors: the income yield, plus the forecast growth in that income, plus the change in market sentiment as denoted by the price-to-earnings ratio.

For Stanford Brown, this is just as true for property as it is for bonds and equities.

“Dividends and dividend growth are what matters in the long run, not PE ratios.”

3. The long term is easier to predict than the short term

“Don’t ask us where we think the market is going this year. We don’t know,” the advisers said.

But neither does anyone else, “though it doesn’t stop most market commenters from offering their ‘expert’ opinion”, they continued.

It’s a different story for 10-year projections, with Stanford Brown admitting that “the probability of us being right will be vastly improved”.

Why are they so much more accurate?

Referring back to golden rule number one, “markets rhyme and people are predictable”.

4. Valuations almost always mean revert

What goes up, must come down.

Stanford Brown has referred to this as “one of the most golden of all the rules”.

What makes it more difficult to follow is that you rarely know when.

The price-and-earnings ratio of the Australian equity market has averaged “about 16 times” over the past hundred years, it was outlined.

The guide also indicated that a “PE ratio substantially above that [average] is likely to act as a long-term headwind to share prices, and vice versa”.

Similarly, “the performance of a typical fund manager also means reverts”.

Stanford Brown conceded that “last year’s top performers are often next year’s dogs”.

5. Keep fees and taxes to a minimum

“One of the best ways your friendly neighbourhood adviser can justify his fees is to do something; sell a share, buy another, find a new fund etc.”

Stanford Brown said more often than not, this activity will merely eat away at the portfolio’s value and generate trading fees.

It cited “overwhelming evidence” that excessive trading reduces portfolio returns.

6. Things are not always as they seem

In reality, “there are no such things as ‘defensive’ assets and ‘growth’ assets – there is a line stretching from government-guaranteed bank deposits to speculative penny stocks, and every asset sits somewhere on that line”, Stanford Brown has advised.

“As the price of any asset class climbs, not only does its future return diminish but it also becomes more risky,” it offered by way of explanation.

7. Be the devil’s advocate, not his friend

Stanford Brown has hailed its own investment process here, noting itself as “contrarian” in its style and “forever scanning markets for unloved assets where all the bad news is fully priced in”.

“If we believe an asset class has a poor future return profile, we will remove it,” it said.

According to the group, “this may lead to periods of underperformance (more likely in roaring bull markets) but in the past has produced more stable portfolios over the cycle”.

8. Don’t copy your mates at the golf club

Stanford Brown has commented that “we all know him – the guy who insists on telling you about his latest biotech stock purchase that tripled in value last week alone”.

“What we also know is that he is omitting to tell you about all the dreadful trades he has made,” the guide continued.

It cited the Dalbar study which revealed the average American retail investor underperformed the stock market by 8 per cent each year over a 20-year period… but why?

This is where rule number one again comes into things: “Investors rarely get greedy when others are fearful, nor do they worry when others are greedy.”

9. Cash will destroy your wealth in the long term

Quoting Tacitus, “the desire for safety stands in the way of every noble enterprise”, and Stanford Brown has noted how pervasive the desire for safety is among many investment portfolios.

It simply stated, “Safety stands in the way of success.”

10. If all your eggs are in one basket, watch the basket

Far too much attention is placed solely on the returns achieved by a portfolio, it was stated.

Considering risk to be as important as returns, Stanford Brown has emphasised the importance of performance under various market conditions, despite suggesting that “few notice the route taken to achieve those returns”.