ISO: A Better Investor

Are you in search of ways to make yourself a better investor? Do you feel like you don’t know what to do when and how? Do you get overwhelmed and confused by all the advice out there about investing?

Well, let me be one more person giving you advice. No frills, selling points, or fancy terminology, just 6 quick and easy ideas of how to become a better investor.

1) Don't listen to market or economic predictions

Market predictions aren’t helpful, as they are wrong more often than right. And when they are right, it's often for the wrong reasons, and vice versa. 

If you look at the track record of the “experts”, it’s kind of sad actually. Don’t fall into the trap of being scared (or overly enthusiastic) by what they say.

Instead, find a good investment mix for you (see #5 below), and stick with it.

2) Turn off the financial news

News programs are literally paid to stoke fear, because fear sells. People tend to watch or click links for the “bad news” of the day.

But there’s a problem with that…

Fear makes us worse investors.

Having a posture of optimism has historically been the right call by a mile. I don’t see that changing any time soon.

3) Have a never-sell mentality for your long-term investments

Timing the market usually doesn't work out, so I think it's best not to try. 

Instead, stay invested. Stay the course. Don’t waver, even when things are scary. Investors have been rewarded for this time and time again.

4) Never become a forced seller

Make sure you have enough cash in the bank to weather the inevitable bad times that will come along. You don’t want to be in the position of having to force sell your investments at a disadvantageous time (and no, that’s not a Star Wars reference, although I suppose selling something using the Force would be pretty cool).

The idea behind having a large cash position is to protect you from a “triple whammy”. Basically, this means three major bad things happening at the same time. For example, depending on someone’s circumstances, it could be (1) losing your job, (2) a stock market crash, and (3) some other emergency like having to replace your roof. If a triple whammy were to happen, you want to make sure you have enough cash to be able to cover your expenses without selling your stocks (which would be at lower levels due to the market crash, and therefore at a bad time to be selling them).

Having a nice, plump cash position offers so much peace of mind.

5) Have an appropriate balance between stocks, bonds/cash, and real estate

This one is a bit tougher to implement, and admittedly has a bit of fancy terminology in violation of the introduction to this blog post. But bear with me.

There are three main asset classes, or types of investments:

  1. Stocks: Any and all equities (including in mutual funds),

  2. Bonds/Cash: All interest-earning assets, such as bonds (including in mutual funds), bank accounts, CDs, and cash, and

  3. Real Estate: Your primary home and any other homes or land you own (the total value, not including the impact of mortgages).

Each of these three asset classes has a specific function to play in a well-balanced portfolio. Ideally, you want a healthy mix of the three, as each has unique characteristics that tend to do well in different economic circumstances.

A good mix to aim for might be 1/3rd, 1/3rd, 1/3rd, although that depends on many aspects of your situation, such as your life stage, individual risk profile, and where you live. For example, you very well might want a higher allocation to stocks than bonds/cash, depending on your circumstances.

6) Time is your friend

Don't watch investments daily, weekly, or even monthly. Stocks go up, stocks go down. It feels exciting, it feels scary.

But it’s all just noise compared to the long-term trend.

So don't worry about short-term fluctuations; you're in this for the long haul.

Summary

That’s it. As you can see, these 6 ideas aren’t extravagant or overly hard to understand.

Obviously, there’s more to investing than these few words. There are numbers and strategies and endless ways to do it “right” and of course “wrong” as well!

But these 6 ideas all have to do with the mindset and foundation of how you invest, and should lead to long-term, sound investing.

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The Economy: Trick or Treat