Twelve Things About Investing that You Should Know Before You Invest

  1. Investment success is not about what to buy; rather, it is about how to plan.
  2. When faced with a complex task like designing and implementing an appropriate investment portfolio, the first solution you think of is often not the best solution. If you’re not evaluating alternative solutions, you’re not investing prudently.
  3. What’s the market going to do? This question is relevant only if you think that investment success depends on correctly forecasting the future. If you do indeed think that this is the case, find a fortune teller. A prudent process does not put you in the prediction business.
  4. Investors seek objective, independent investment advice tailored to their specific needs and circumstances for a fair price. If you’re looking for objective, independent investment advice for a “bargain” price, you won’t find it.
  5. A track record is “visible.” It is an outcome that you can see. It is a result of an investment process that you cannot see. It is the process that’s important—not the outcome. A poor process can have a lucky outcome; but poor decision making is unlikely to lead to long term success. A prudent decision-making process gives you the best chance of financial success.
  6. Investing is primarily about risk. You become a sophisticated investor when you realize that you can often generate more long term return by controlling risk than you can by grabbing investments with high expected payoffs.
  7. Investing is also about time. Time does not mitigate risk—it merely provides more opportunities for things to go wrong. Time, however, allows you to employ strategies to meet your specific cash flow needs.
  8. Long term investors are, by definition, also short term investors. The long term is made up of a sequence of short terms. If things go wrong in the short term you need to think about how to adjust. You can’t rely on the long term to bail you out. Investors require ongoing advice and consultation.
  9. The single greatest constraint on investment success is time. A little time productively spent today can save an ocean of time tomorrow. Failure to devote sufficient time to the investment enterprise often results in defaulting to solutions that use expensive, problematic financial products.
  10. Markets go up and markets go down. You cannot earn returns in excess of the risk free rate without market fluctuations. Investing is primarily about asking yourself what you will do during the bad times. It’s nice to focus on how much money you can make; it’s critical to focus on how much money you can lose.
  11. A portfolio that is consistently invested 50% in stocks and 50% in bonds is much safer than a portfolio that is invested 100% in stocks 50% of the time and 100% in bonds 50% of the time. Relying on an advisor to keep you in stocks during prosperous times and in bonds during recessionary times produces fabulous results right up until the time that the advisor’s predictions go wrong. It’s probably a good idea to avoid strategies that can turn into land mines.
  12. Your advisor should acknowledge his role as a fiduciary within the scope of the engagement for which he is hired. It’s important that you know this—too many investors have been scammed.

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