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You Can't Become Rich In Your Pocket Until You Become Rich In Your Mind | ||||
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The challenge facing investors has been to identify good investmentsThe investment game has changed over the past two decades. Historically, the challenge facing investors has been to identify good investments. While thats obviously still important, investors increasingly recognize that that alone isnt enough. Five good mutual funds can still make a bad portfolio, or at least one thats inappropriate for a given investors goals. Its becoming clear that investors must move beyond good versus bad investments and toward appropriate or inappropriate usage of investments, taking into account their time horizons and risk tolerance. Its a level of analysis that doesnt transfer well to the sound-bite world of televised financial advice, but its where investors need to go if they are to succeed. In this new reality, investments are the easy part. Determining whether a stock or a fund is a quality offering with reasonable prospects is a fairly straightforward task in these days of widespread financial information. Knowing where a given stock or fund fits in your portfolio thats a much trickier task. Ultimately, however, the art of investing involves more than simply identifying good investments; it means finding the right match between investment and investor. Its no easy job. Yet its what good financial planners do every day, and its the reason that I have such great respect for these people. When I first started tracking mutual funds in the mid-1980s, I knew of brokers who could sell you stocks or funds, but I knew little about the growing field of financial planning, which aimed to craft full-fledged financial solutions for their clients. Over time, however, I came to know a number of financial advisors and became a part of their discussions. Like most investors, I was thinking in words or phrases, but these advisors were thinking in fully formed paragraphs. They understood, quite correctly, that investments alone were not the full game. To succeed, you need to know how and when to deploy them; you need a game plan. Vern Hayden is as fine a planner as I know. Hes up on all the latest academic research, yet he retains a remarkable ability to translate the often arcane language of finance into straightforward counsel that even beginning investors can understand. Not surprisingly, these traits have made him a favorite guest on CNBC and other financial media. But unlike some media favorites, Vern never opts for the sensational over the sensible. His advice is always on target and always well grounded. I think youll find this book valuable. Its full of great ideas and tangible examples that will show you how to craft a sensible investment plan. Whether you continue on your own or opt for the services of a professional advisor to help you manage your money, this book will start you in the right direction with a game plan for the future. These 10 investing principles are integral components of the steps outlined in this book. Use these plays and youll be well on your way to creating, working, and winning your investing game plan. 1. Protect that principal. Hang on to the money you already have. Thats the first rule of investing. Some loss some of the time is pretty inevitable in the stock market. But the best money managers limit injury to your portfolio and prevent unnecessary losses. In evaluating a mutual fund or even the performance of your overall portfolio, pay close attention to how the fund or portfolio fared in down years relative to its benchmark. Its more important that managers do better than the market on the downside than whether they outperform on the upside. 2. Be your own benchmark. Benchmarks like the S&P 500 may hold the public spotlight, but they must be secondary to your personal benchmark. Focus on what returns you reasonably need to meet your goals. Knowing your benchmark can enable you to avoid assuming more risk than necessary. Keep your eye on your own game, not the one on the next field. 3. Buy and adapt. A good investing game plan is not rigid. Its dynamic. Whether were talking about your percentages in stocks versus bonds or your choice of specific mutual funds, you cant be afraid to change. Change can be good, if its based on good reasons, such as the Great Bear Market of 2000-2002, a new and untested fund manager, or a sudden shift in your personal life. Structure and steadfastness are smart. Stubbornness is not. Just be sure your short-term actions dont unintentionally undercut your long-term game plan. 4. Whatever your age, get an offense and a defense. Age gets too much focus in most financial planning assessments. Just because youre young doesnt mean you should be ultra-aggressive and lose all your money. You can never really make up time. In fact, youth is when you should be growing your money, not losing it. It is the early money you invest that compounds and grows the most dramatically over time. At the other extreme, there is no set age at which you cant afford some upside risk. Any age can warrant an investing offense and an investing defense. 5. Plan short term for the long term. The financial planning profession loves a 30-year plan. But the prospect can be so daunting that it prompts people to give up any hope of planning at all. Avoid paralysis by breaking up your projections into time periods that are manageable for you. A solid five-year plan can be extremely effective. It guides and encourages you to act nowand now is the only time that you can invest money for your future. 6. Look at risk as well as returns. Would you rather have a 50 percent chance at $10 or an 80 percent chance at $8? Although most people would pick an 80 percent chance at $8, thats not how they invest. They dont pay attention to the risk fund managers take to get the returns they post. Sometimes $8 is better than $10, if it means youre not jeopardizing your principal. Give risk its due, because the less you take, the better chance you have of not losing money or at least not losing as much. 7. Hit the books (or the Internet). If youre a new investor, learn the differences between a stock, a bond, and a commodity. Once you have the basics down, theres always more to learn. Read good investment books, learn to distinguish between a sales pitch and sound advice, and then invest in what you know and whom you know. Whether youre a do-it-yourselfer or a client, homework pays off. 8. Avoid sectors unless you can handle the high-risk adrenaline rushes. Industry sectors are sexy but dangerous, as they cycle in and out of favor so fast. Those tempted should keep their sector investments to small doses, pay close attention, and act quickly. If you want more excitement, I recommend Vegas. 9. Keep score. The investment industry wants nothing more than for you to fork over your money and forget about it. But contrary to the blind buy-and-hold mantra, you should stay abreast of your investments. Knowing where your money is invested and how its doing will help you make better decisions, not worse. Do-it-yourselfers should tally the progress of their investments twice a month (I check in on 421 funds every Friday). If youre working with an advisor youre not off the hookyoull need to make sure he or she has a good system to track your progress and apprise you of developments. Just dont let the near-term focus make you lose track of your long-term strategy. 10. Be professional or get a professional. If you measure up to the task of doing it yourself and you have the time, talent, and temperament to pull it offthats great. If you dont, find a professional advisor who understands and can work with your resources, goals, and value system. Make sure your coach is giving you effective, honest, and objective plays to run with. Its your team and your game. |
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