Save. You can't invest money until you've saved money. And nothing will have a bigger impact on our ability to realize our financial and life goals then living within our means.
Keep Enough Liquidity/Reserve Cash. Make sure to keep sufficient reserve funds just in case ______ happens. Fill in the blank. Add money needed to meet short-term goals, e.g. car purchase, tuition, etc. Making sure you have staying power when others -- your competitors in the market -- do not is a fundamental investment discipline. You’ll have to accept lower returns on cash, but this should be seen as supporting higher returns on investments. You’ll have the option to think longer term when others, including Wall Street hotshots who often get overleveraged, can’t.
Keep it simple. Don't stray from your circle of competence. It's all too easy to be lured to the rocks of destruction by various siren songs -- friends, neighbors, investment salespeople. Complexity is costly and rarely yields benefits to the consumer. This applies to investment products, insurance products, real estate deals, hedge funds, you name it. The further you stray from your circle of competence, the more likely you will get lost (and lose).
Focus on things you can controland know. Have the wisdom to know what those things are and are not. Accept risk (and the direct relationship with returns) that is appropriate for your situation. Manage risk through asset allocation, diversification, and time diversification instead of trying to forecast markets or the economy (another siren song for investors). This requires putting a disciplined framework around fears and sometimes ego, while maintaining a realistic view of probabilities for success.
Maintain a Clear Perspective on Investing vs Speculation. There are many ways to approach investment strategy, but it is important to actually consider the evidence and probabilities associated with strategies. It is easy to tell you not to speculate (literally, to guess), the hard thing will be for you to follow this advice. If you want to speculate, do so with your eyes open, knowing you will probably lose money in the end. Be sure to limit the amount at risk and separate it from your investment program.
Set aside some "funny money." Put aside 5% or so of your portfolio for dabbling purposes. Use it to buy that hot stock your neighbor told you about. You'll win some and you'll lose some, but most importantly, you might learn some valuable lessons and prevent yourself from doing silly things with your serious money.
Keep it cheap. Fees subtract directly from your investment returns. Be stingy when it comes to the price that you pay for investment products, as well as the price you pay for advice. Be aware, though, that costs come in many forms and may be hidden.
Be Tax-aware. Don't give Uncle Sam more than you have to. Look for tax-efficient investments, employ tax-loss-harvesting strategies, distribution strategies, and optimize the tax location of your assets. Maximize contributions to retirement accounts. Focus on long term capital gains rather than income. At the same time, realize that while taxes are painful, paying some taxes is a fact of life if your investments are successful.
Keep a decision journal. Scribble some notes to document the reasons behind your buy and sell decisions. This will keep you honest, help you learn from your mistakes, and give you a more sober view of the underpinnings of your successes (skill or luck?). I utilize OneNote for this purpose. I can forward an e-mail, article or web link to the appropriate section in my research Notebook with two clicks.
Allow yourself to be sold. Good investments rarely need to be sold. Investment products developed by brokers, insurance people and the like are made to be sold. Be skeptical. Run, don’t walk, away.
Overcomplicate things.I’m repeating this because it’s so important. Be skeptical of complex schemes that purport to somehow defy fundamental relationships between risk and return. There’s always a cost somewhere; there’s no free lunch. Accept risk and dial in the proper amount.
Let the tax tail wag the dog. Minimizing taxes is really smart but remember to consider the total costs and returns (or lack thereof) related to financial decisions, including the accounting bills, time, effort and stress related to complex schemes. Beyond retirement accounts, carefully weigh the costs and risks associated with vehicles purported to be tax shelters. Foremost, is it a good investment? Don’t let the “tax tail wag the dog.”
Allow bull (or bear) markets to skew your thinking.Remember that what’s going on in the market at a given moment isn’t necessarily an accurate indication of how the economy is doing. For example, the market’s strength in the late 1990’s and mid 2000’s, was hardly an accurate indicator of the economy’s enduring health. Nor was the bear market of 2007-2009.
Count your money while its sitting on the table.Corollary to the above, don’t think about spending investment or property appreciation until you actually book it. During bull markets some people are tempted to overspend or borrow based on increases in asset values, which may be fleeting. That’s what happened leading up to the financial crisis.
Time the market. Its also easy to say, “Don’t time the market”,but very hard to do.It’s okay to keep an eye on market fluctuations (or not if you’re goals are long term). But in doing so, keep a firm distinction between “timing” and “pricing”.Timing means changing investments based on predictions on things you cannot know, and even if you did, you cannot know how they will play out in the market, which often acts counter to expectations. The further you get from Wall Street, the more skepticism there is as to the pretensions of market timing, and to the innumerable predictions that appear every day. There is no basis in probability or experience to suggest that you’re likely to increase returns by moving in and out of the market, especially after taxes and transaction costs. “Pricing”, on the other hand, refers to rebalancing -- the endeavor to take advantage of market fluctuations by reducing exposure to asset classes when they are well above fair value below, and increasing exposure to those below fair value.
Watch Business Media. Not unless you’ve developed critical ability. Try not to pay too much attention to what is going on in the markets and how they are affecting your portfolio. Turn off CNBC, take a break from The Wall Street Journal, and maybe pick up a good book instead. I recommend Jack Bogle's Little Book of Common Sense Investing. This is exceedingly difficult, but tuning out short-term noise can keep you focused on your long-term goals and prevent you from tinkering with your portfolio at exactly the wrong times.
Finally, I’d like to share one of my favorite quotes from Nathaniel Hawthorne, who lived in Concord: “A foolish consistency is the hobgoblin of small minds.”
In other words, be open to change and to innovations in your approach to markets. It’s important to be stubborn, but not blind! Download PDF