BASIC INVESTMENT RULES
Investors who adhere to eight uncomplicated common-sense rules will increase their chance of success over the long run.
1) INDEPENDENCE: Total control over your money is indispensible. You need to be in on and conscious of every change in your portfolio, even if you succumb to working with a professional advisor. Remember, that no one is ever going to take care of your money with more enthusiasm and responsibility than you yourself.
2) COST-CONSCIOUNESS: As an independent investor, the drive to save money on stock commissions will lead you to discount brokers. Pick the one imposing the lowest hit as long as you can work comfortably with that company. Buy only mutual funds that do not impose a sales charge. Reading and researching will show you that many investments can be bought directly from sellers without any transaction charge imposed.
3) CURIOSITY: Soak up knowledge by reading financial books and publications, learning to separate what’s important from what is not. A lot of material simply fills up space. More importantly, the wise investor researches an investment before he or she buys it. This is particularly true of individual stocks.
4) RISK-CONSCIOUSNESS: Employ risk to your advantage. Investments with higher levels of risk are likely to earn higher returns, but, of course, there are no guarantees. A risk-free portfolio will produce mediocre returns over the long run. People who need optimum current income from all of their investments as part of their living subsistence are the only ones who should avoid all risk.
5) COMMITMENT: As elsewhere, time can heal wounds in the investment world. That doesn’t mean all investments should be held endlessly. But each should be given time to justify the appeal that surfaced as the investment was being researched. Continual trading and portfolio reshaping, triggered by impatience, can be destructive. Decidedly, don’t try to time the stock market. Maintain long horizons.
6) FLEXIBILITY: Though holding quality investments for the long-term generally pays off, be prepared to shift gears as economic conditions and stock market dynamics change. The need to be flexible makes portfolio liquidity important. You need to be able to sell most of your portfolio components with one phone call. But be wary of overdoing turnover. However, a key shift doesn’t have to be widely disruptive, but could be as innocuous as moving from money funds to Treasury notes as interest rates rise.
7) TAX-CONSCIOUSNESS: Be wary of the tax consequences of every investment you own, because taxes are a drain on returns. As obvious as this is, too many investors totally ignore the inroads of taxation. But don’t become obsessed with trimming taxes here and there on a runaway basis. Remember, while the tax burden on investors is heavy, there would be no fat tax if there were no fat return to tax, and investment return is the bottom line.
8) SIMPLICITY: Keeping a portfolio simple is one axiom not preached by most professional advisors. They like complex portfolio components because they can spend time explaining them and justify their self-enriching role. If an investment is so complicated that you “just don’t get it” then “just don’t buy it.” There are enough uncomplicated investments to supply every portfolio.