Golden Investment Rules: 11 For 2011
A New Year brings new money resolutions and commitments to be better savers and investors. To help with the process, I prepared this segment for WCBS-TV--I called it "Golden Rules for 2011," but of course they are same for every year!
Golden Investment Rules: 11 for 2011
- KISS: My first mentor always said, "keep it simple, stupid!" Whether trading gold options on the Comex or creating an estate plan for a client, throughout my career, I have fully embraced the notion that it's easy to make things complicated, but challenging to make them simple.
- Create an Investment Plan: Want to build a house without blueprints? Me neither. While planning can be daunting, there's plenty of professional help if you can't quite do it on your own.
- Understand Risk vs. Reward: If you had a choice to earn 13 percent with lots of risk or 9 percent with half the risk, which would you choose? Reviewing investment returns is useless you take into account the risk necessary to achieve that given performance.
- Listen to your mother: There is NO Free Lunch: Perhaps two market meltdowns in one decade has cured investors of this notion, but mark my words: at some point in the not-so-distant future, someone will tell you that there is some investment that is "risk-free". This is nonsense--just like your mother told you, there is no free lunch.
- Embrace a diversified allocation: Without proper allocation (stocks, bonds, commodities, cash), you will repeat the mistakes of the past--you can take that one to the bank.
- Be disciplined and Rebalance: MoneyWatch blogger Alan Roth has done the math and proven that rebalancing works. Score one for mathematics over emotion!
- Reduce Expenses & Taxes: The easiest way to improve your investment performance without risk is to reduce your expenses and tax liability.
- Know what you own: You should never be surprised by how an investment in your portfolio performs. If you are, chances are that you do not understand the various holdings in the account. Make it your business to understand what you own.
- Accept that you will be wrong: When I was a 16 year-old summer clerk on the floor of the NYSE, my uncle told me something that always stuck in my mind: "Honey, in this business you can be wrong half the time and still make money!" He was referring to trading, but being a rational investor requires that you accept losses in certain positions from time to time.
- You will not get rich quick (and that's good!): Hat tip to Alan Roth again on this one--check out his post on the topic.
- Beware Optimism AND Pessimism: As my dad, the 40-year veteran of trading always likes to say, "It's never as good or bad as you think!" Investors often make their worst decisions when either extreme take over. Guard against the classic battle between greed and fear by sticking to your game plan.
