It’s that time of year when the media is filled with all
manner of terrible investing advice: “10 ETFs to own in 2016!” Note I am not going
to tell you to “buy this, sell that.” I can’t for the simple reason I have no
idea who you are, what your financial goals are, what taxes you owe, what you
earn, how much you have saved and how old you are. Without knowing those
factors (and other relevant information), how can anyone tell you what is right
for you? Instead, I am going to share 10 ideas with you. Follow them, and you
will be a better all-around investor.
1. Write out
your investment philosophy: How can you put your money at risk in the
capital markets if you do not have a philosophy you can articulate? It should
be short and easily understood. You would be surprised at how many investors
don’t have one. I’ll give you a start with my own investment philosophy: I own
a broadly diversified portfolio of low-cost global indices in various asset
classes and I rebalance them regularly. That’s the short version; the longer
version explains the advantages of indexing, why keeping costs low and
diversification are important, etc. Now you try.
2. History
teaches us: What has the market done? How long do bull and bear
markets usually last? How far can they go? How do they begin and end? We spend
a lot of time around the office looking at historical data, running regression
analyses to see what the past has looked like: What happened when rates rose
from very low levels with low inflation? What is the actual average valuation
across time? Very often, the market behavior that people seem to think is
unique is really quite ordinary.
3. How can you
better understand money? Over the years I have come to think of money
as a tool; it allows me to buy the necessities, as well as security, comfort,
memories and the occasional toy. I obtain money by trading for it with my time,
which is a (very) finite resource. Many people do not seem to understand what
money can and cannot buy for you. Some do not realize how expensive it is to
buy money with their time.
4. What am I
getting wrong? Simple fact: You will be wrong, quite often and,
occasionally, quite spectacularly. The key to being wrong well is to not waste
it. Ask yourself three questions: What do I not realize I am wrong about? What
ways can I identify errors and avoid blind spots in the future? And, perhaps
most important of all: What can I learn from my mistakes? Do these three things
and you will be smarter than 90 percent of the people you meet over the
next year.
5. Become
comfortable with basic math and statistics: You cannot be an investor
and not have a basic facility with numbers. You have to be able to review your
own investment returns, understand what is owed to you via dividends and bonds,
review your quarterly statements, and be able to discern how well or poorly you
are doing. You have to be able to calculate how much money you are going to
need to live on once you stop working. You need to figure out compounded
returns, discount the effects of inflation and determine a percentage annual
draw off of that nest egg.
6. How many
books did I read last year? Which books should I read? Think about the 10
people you would like to learn from; then go read their books in 2016. Or,
alternatively, try this: Ask 10 people you admire what the best book they read
last year was, and that’s your annual reading list.
7. Understand
human psychology: Speaking of which, the myriad ways in which people
react to external and internal stimuli help to explain why the markets have
been topsy-turvy. When thinking about psychology, there are only two things you
need to learn: Crowd behavior and your own. Master those two and you will
become an extraordinarily successful investor.
8. How can I
eliminate noise and distractions? This is a subject we have addressed
previously, but it bears repeating: You want less of the distracting nonsense
that interferes with letting your portfolios work for you. Most people spend
too much time on irrelevant noise. They end up with too much information, but
it is all of the wrong kind. They rely on anecdotes and narratives instead of
data. And they easily confuse short-term concerns of traders with their much
longer term investing goals.
9. How can I be
more productive and efficient? I don’t mean this in the way that the
management consultants do, I mean this simply: How can you do the things that
have to be done as quickly and correctly as possible, so you can spend time
doing what you really want to do?
Some people are fortunate to be able to work in a field that
they truly enjoy. Still, it does matter if you want to get things done and
focus on the most important things. Which brings us to our last thought:
10. How am I
spending my time? How do I want to spend my time? This is very important,
one that many folks don’t think about until it’s way late. Time is an extremely
limited resource, one that you should use appropriately. Are you spending this
finite resource doing things you dislike, or are you pursuing that which gives
you the most satisfaction?
Remember, everybody gets the same 24 hours each day. What
differentiates some people from others is how they spend that precious
resource.
Click
here to access the full article on The Washington Post.