Do you ever ask yourself, “How should I invest?” If so, you’ve found the right post. This week you’ll gain an unfair advantage over most other investors. Over the course of the week, you’re going to understand how three very different investment strategies work. As a result, you’ll be able to make very smart investment decisions and significantly reduce your anxiety and stress.
I got clear on the need to write this after receiving a stinging email from Keith telling me he wanted good old fashioned investment advice from the blog. He “encouraged” me to stop fooling around with all these breezy ideas and acrobatics. He wanted to know what to invest in now.
Before we get started, understand that there are really two kinds of investors. The first kind just wants to start creating wealth right now.
Scratch that. This investor demands that his investments make great returns all the time. (We all have a little bit of this kind of investor inside us as you’ll see.) But this mentality is extremely dangerous and usually based on emotions and opinions rather than facts and reason. Fortunately we usually temper that little voice.
The second kind of investor wants to achieve her financial goals while taking as little risk as possible. This is the “adult” investor inside us. It’s the internal voice that tells you to eat your spinach — even though you hate the taste. That same voice tells you it’s ridiculous to expect great investment returns all the time. This investor is willing to accept the trade-offs associated with every investment decision.
In reality, most all of us have a bit of each type of investor inside of us. But if you are a long-term investor, which is a better question to answer? 1) How much money do you need to retire? or 2) How much money can you make this month in the market? I think the answer is obvious.
My goal is to be your personal financial trainer this week. We are going to take the “adult” investor and do a workout. This way, when the first kind of investor comes around, the “adult” can kick its butt.
This week, I will post a series of articles on a variety of investment strategies and tactics. We’ll discuss the pros and cons of each approach. These articles will be an effective tool you can use to quiet that impatient unrealistic voice that is costing you stress, anxiety and lots of money.
The foundational elements of this series.
There are three concepts that are the basis of everything we will discuss:
1. Every investment is both wonderful and terrible. It just depends on what timeframe you look at.
You can always point to some particular time period and prove that a given investment works. And you will always be able to point to some other particular time period and prove that the same investment fails.
2. In order to make smart investment decisions, you must first be clear on what timeframe you are looking at.
My comments above should explain why this concept is so important. Don’t ask how to invest your money. Ask how to invest money over the next “X” years
3. You can’t predict the future.
I don’t want to be the one to give you this news…but…eh…you really can’t. When you see some genius on TV make a prediction that later comes true, just remember that this fortune teller won’t tell you about all the times she got it wrong in the past. Even a broken clock is right twice a day.
These are fundamental truths about investing. From these fundamentals, we derive three rules that you aren’t allowed to break:
1. Unless some personal emergency comes up, you are not allowed to change your investment timeframe in evaluating your investment decisions.
2. You are not allowed to try to predict the future.
3. You can’t have your cake and eat it too. There are pros and cons to every investment decision you make. You have to accept that every investment has its drawbacks.
If you accept these three rules and keep them in mind, the next four days are going to help you improve your financial life dramatically.
At this point, you might be telling yourself that you’ve always invested by these three rules. Let’s see if that’s true.
Have you ever complained about not earning enough interest on your savings or CDs even though they were earning market rates? You’re only complaining because you are breaking Rule 3. You don’t accept the trade-off of low interest for short-term security.
Have you ever complained about lousy stock market performance? If so, sorry. You are breaking the same rule.
Have you ever said, “I know that nobody can predict the future but this stock is going to a) double over the next six months; b) never get back to where it was; or c) go to zero over the next year”? You’re breaking Rule 2 — you’re predicting the future. I told you not to do that!
Using these three rules, we’re going to discuss the pros and cons of:
a. Timing the market (yes, there are pros to this approach).
b. Buy and hold.
c. Asset allocation.
If you join me on this journey and make investment decisions with this knowledge in mind, you’ll find yourself making much smarter financial choices. Let’s get started. Click here to see tomorrow’s post on market timing.