Have you ever embarked on a home improvement project? You are confident you can complete the task, but you are unfamiliar with the details.
A “how to” clip is usually available on YouTube, but there isn’t a practical way to reach out with follow-up questions. You need guidance from a caring individual. That is where your local home improvement store comes into play. I have usually had good luck with Home Depot. The employees not only know their craft exceedingly well but are excited to share their ideas. You can see it in their body language when they explain the nuances of a project. Plus, they are happy to share any problems you might encounter and how to sidestep pitfalls. They are, in one word, educators. What they have taught me and what I’ve learned through various projects in life is a fairly simple concept: “Experience isn’t the best teacher–someone else’s experience is.”
I have many goals that I want to accomplish with you. When I ponder the fact that you have entrusted me with your finances, your financial goals, and your dreams, it is truly humbling. Of course, I understand that there are differences between a financial plan and a home improvement project. But I draw up the analogy because they have one commonality–they are linked by the educational component. Just like the friendly individual at the home improvement center, who thrives on his/her customer’s understanding of a project, I experience the same thrill when you begin to grasp the basic skills that make for a successful investor.
This month, my goal is to share with you some of the basic building blocks that will put you on the path to becoming a lifelong student of investing. Even the best of the best never stop learning. In fact, being a lifelong student might just be the first principle of becoming a great investor. So, let’s get started.
1. Create a long-term plan and follow that plan
“A plan is a bridge to your dreams. Your job is to make the plan or bridge
—Robert Kiyosaki, the author of Rich Dad Poor Dad
Agreed, but I take exception with one part of the quote. It’s not your job to make the plan real. With your input, that’s my job! If we were to go back 50 or 60 years, the choice of investment vehicles was limited. You might choose between stocks, bonds, mutual funds
2. Learn to control your emotions
Successful investors learn how to control their emotions.
Most of us remember Mr. Spock from the original Star Trek series. He was half human and half Vulcan. He was half human and half Vulcan. His Vulcan half made him the epitome of rational thought and he rejected emotional responses. I get that he was a fictional character, but none of us can match Mr. Spock’s steely devotion to logic. However, we don’t need to be as stoic Mr. Spock if we have a well-thought-out financial plan. The plan is grounded in empirical research. It provides us with boundaries. It keeps us on track when storm clouds gather. We recognize the plans we recommend are not bulletproof, but we are confident they put people on the best long-term path for reaching their goals.
I also know that when volatility strikes, some folks take it in stride while others want to take a detour from the plan. They are tempted to react emotionally. I get it, I really do.
While heading to the safety of cash may feel good in the short term, I’ve seen the anguish of those who have opted for the sidelines near a market bottom and then watch in dismay as shares began to climb. Remember, longer term, markets rise in most years.
Recall 2008. According to a Fidelity study, “Investors who stayed in the markets saw their account balances—which reflected the impact of their investment choices and contributions—grow 147%” between Q4 2008 and the end of 2015. “That's twice the average 74% return for those who moved out of stocks and into cash during the fourth quarter of 2008 or first quarter of 2009.” Stocks bottomed in early March
3. Become disciplined and be patient
We are open to innovation and empirically verified research, but I would caution you to be very careful about what I call the “flavor of the month.” Remember the dot-com boom? Like shooting stars, fast-growing companies soared into view for a brief period before fading into obscurity. The legendary investor Warren Buffett sticks to what he knows best and invests over a very
4. You must diversify
Here’s a principle I live by: a one-investment portfolio is too risky. Diversifying among stocks, bonds, cash, real estate, and commodities doesn’t guarantee there won’t be short-term losses, but it greatly reduces risks and allows you to participate in investments that are rooted across the U.S. and global economy.
5. Never lose a healthy level of skepticism
A good investor asks questions. Following simple but time-tested principles can prevent fraud. Be wary of investments that promise riches or offer returns that are too good to be true. Today, a con artist won’t use the phrase “get rich quick.” But you will see ads that hype strategies that have quickly turned a meager sum of cash into a big pile of wealth. Such claims should be viewed with a healthy level of suspicion. If these strategies worked, wouldn’t high-powered institutional investors implement them? They don’t.
If you come across such a tempting scheme, please ask me to review it. I promise to offer you an objective analysis. I’ll point out
Great investors have a financial plan. It becomes our guide. It is a financial road map that puts you on the best path to your financial destination. It is the bridge to your dreams.
Well, I wouldn’t say the economy is booming, but the first read on U.S. Gross Domestic Product (GDP) signaled the expansion kicked into a higher gear. At the end of July, the U.S. BEA reported GDP expanded at an annual rate of 4.1%, the fastest pace in almost four years. In some respects, the report was simply confirmation of what we already knew–growth picked up in the second quarter.
But GDP is old data. It’s a review of what happened between April and June. We are in August. I’m not trying to diminish the good economic news. Instead, I am asking, “Can economic growth remain in a higher gear?”
We’ve had false starts before–growth spurts that quickly peter out. Why might it be different this time? Consumer and business confidence is much higher today than in the past (CEO roundtable, NFIB survey, Conference Board). It’s an important ingredient for growth. In addition, fiscal stimulus, including the recently passed tax cuts, is still in the pipeline