December 9, 2008
Why do so many investors turn it onto survival mode?
The goal of investing isn’t to merely survive, but to thrive! And the only way you can do that is by having realistic expectations and a good roadmap on how to succeed.
Author Jason Zweig of Your Money & Your Brain says it this way: “Only fools invest without rules.”
Here are a few ideas to help you start writing your own rule book for successful investing:
Build your financial house on a solid foundation – Homes that are built on a rock solid foundation can usually survive a deadly storm. Your investment portfolio should be the same way. Thrive and survive by making low cost index funds and exchange-traded funds - ones that follow true market indexes - the foundation of your portfolio. Examples of such ETFs are the Vanguard Total Stock Market ETF (NYSEArca: VTI) and the iShares Lehman Aggregate Bond Index Fund (NYSEArca: AGG).
Be opportunistic – Recessions and bear markets should be used as buying opportunities. “It’s impossible to produce superior investment performance if you buy the same assets at the same time as others,” said Sir John Templeton. If others are selling, do the opposite.
Attack deflation and protect yourself against inflation – The best defense against severe asset meltdowns (deflation) is to invest in a diversified mix of asset classes. True it won't fully protect you from losses, but then again, if you keep all of your money buried underneath your mattress and your house goes up in smoke, that won't save you either. The same strategy of asset diversification will also help you during periods of inflation.
Consistently save and invest - It’s impossible to reach your financial goals if you have a stop and go approach. Even if you have lots of bills, always pay yourself first! Automatic payroll deduction and dollar cost averaging can help you to do this.
Keep your investment expenses low – The best indicator of future performance is fees. The higher your investment fees the more likely you are to underperform key benchmark indexes. You can minimize the impact of fees by owning low cost index funds and ETFs.
Check your asset mix - Before you decide to convert your entire investment portfolio into cash, first check your asset allocation to make sure you have the right mix of investments. If you’re getting killed, it’s probably because your asset mix is wrong or because you’re using the wrong financial ingredients.
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Avoid financial puberty or “FP” – I define financial puberty is an immature view of investing and money that prevents people from flourishing. Financial puberty will strangle even the best of investment plans. It’s impossible to enjoy investment success if you’re irrational, emotional, and scared.
Limit your downside – Severe market losses can be devastating. If your portfolio loses 50 percent of its value, you need it to rise by 100 percent just to get back to where you started! Oddly, some people are still intent on committing financial suicide - so if you’re going to roll the dice on fund managers or individual stocks, here’s what I suggest; Only do it with money you can afford to lose. All of the money that you care about should be indexed to the market.
Focus on Your Portfolio, not the Economy - Focus on things you can control, like your portfolio's fees, asset mix, and tax efficiency. Even during difficult times, it's still possible to enjoy a measure of investment success. The stellar performance of ETFguide's Ready-to-Go Portfolios proves that having the right mix of funds is more important than hand selecting one or two funds.