Tuesday, April 19, 2011

My Investment Principles

Having a rational approach to money and investment - and realistic expectations, is the key to successful investment. 

People like to buy snake oil, and the snake oil that people are guzzling today is investment advice.  Too late, many baby-boomers are realizing that they chose not to save and they are facing a bleak retirement, and compounding this are things like early layoffs or early retirement, which catches them blind-sided.

So when the snake oil salesman comes into town, and tells them that their pitiful portfolio can be made to grow to huge proportions, by making different investment choices, they get out their credit cards and plop down $49.99 to $499.99 for investment advice, seminars, newsletters, or subscriptions to online services.

But most, if not all of these investment gurus are selling bunk.

Looking for the "trick" to "secret wealth" is like looking for "the one trick to a tiny belly!" - It don't exist and looking for it will just squander your money faster.

You will make money by SAVING it - spending less than you earn, and through compound interest over time, it will grow.  Trying to "beat the market" is like trying to beat a casino.  Good Luck with that!

And like with any good Guru, you have to ask yourself this - if the Motley Fools were such geniuses, they would be richer than Warren Buffet, right?

And they wouldn't be out hawking financial advice, right?


Because the really rich people don't give away or even sell their "Secrets to Investing!" because there are none, and they don't need the money.

On the other hand, people who are not rich, who are not successful, make a living claiming to have the answers - and make money off your gullibility to think that sound investment advice can be purchased.

The way to wealth - the guaranteed way - is very simple.  You put aside money during your lifetime, and let it compound in value over time.  And these basic financial "secrets" are not secrets at all, but are well known to most legitimate financial advisers.

And bear in mind, too, that the financial industry has a vested interest in getting you to buy and sell a lot - they want those trading fees!

The following are my basic investment principles - they are based on basic sound advice I have gotten from others.  You can go looking for "tricks" or "systems" but overall, for the small investor, you can't beat basic sound finances.

1.  Diversify Your Portfolio: The Investment Guru will encourage you to "double-down" your bet by putting all your money into one thing - Gold, or some specific Stock, or Real Estate, or whatever.  If that one investment goes South, you are dead meat.   Putting it all into Enron is never a good idea.  Try to invest in a panoply of investment types - from high-risk to absolutely safe.  That way, if one goes South, you will still have the others.

2.  Expect Realistic Returns:  Thinking you can "beat the market" is never a realistic expectation.  To do so, you have to take enormous risks - and always win.  It is like saying you are going to the casino and will gamble your life's savings - with the caveat that you cannot afford to lose at all.  A nice theory, but the Casino people have other ideas.

Getting a reasonable rate of return across your portfolio is the best most of us can expect.  Some investments will skyrocket, others will tank, and others will chug along.  Your average rate of return will be pretty good, and over time, compound interest will inflate your savings.

2.  Don't Panic When Investments Fluctuate in Value:  During the last recession, many people panicked when the market when down and they did the worst thing possible - the sold out, convinced the end was nigh.  They were using FEAR as investment advice, which is always a bad idea.

Investments will vary in value.  And some will completely tank.  My GM stock is worthless.  Yea, I should have sold it, but then again, I should have done a lot of things.  The best thing I did, was not have too much exposure in that stock - diversifying my investment.

Now my Ford stock, on the other hand, rebounded and is worth more than when I bought it.  Trying to predict the future is an uncertain business, and if I had sold my Ford stock in anticipation of bankruptcy, I would have lost money.  Invest for the long haul, and don't try to over-manage your portfolio.

3.  Continue to SAVE:  While compound interest is your friend, the interest on ZERO is ZERO.  You have to put aside money to invest and save, in order to make money in investment returns.  A huge part of your portfolio is likely to comprise the cash you put in, not the profits from any investment or dividends or interest.  So the more you invest, the wealthier you are - it is called accumulating wealth and anyone can do it by simply spending a penny less than they make.

4.  Put Some of Your Investments into Safe Harbors:  Particularly as you get older, your portfolio should be more and more conservative.  When you are 70, you can't risk losing half your investments in stocks, and should be into more sound, staid investments that, while not earning a lot, are not volatile.

And over time, you should put more and more money into such safe harbors, in case there is a major setback to the rest of your portfolio. 

5.  GET OUT OF DEBT!   One thing that marks the true "market believers" who think they can stock-pick their way to riches is their debt load.  These folks will argue all day long that it is "better to have debt so you can use that money to invest!" - but if you are heavily in debt and lose all your money to investment losses, well, you are not only broke, but bankrupt.  Paid off debt is the safest investment there is, and there is no reason to be approaching retirement with a mortgage.  You should have plans to pay off your mortgage by your 50's.  And well before your 40's you should no longer be borrowing money to buy cars or other consumer goods.  And it goes without saying that Credit Card debt is never, ever acceptable!

These are not "sexy" bits of advice or unorthodox advice that Gurus like to give.  Face it, you'd rather have the "tip to the tiny belly" or some stock tip, than plain old common sense advice which is hard work to follow and do.

But most of the best things in life are hard work, it seems.  And the easy answers are often the worst ones.