9 Financial Rules You Should Never Forget
The Motley Fool's mission is to help the world invest, better. To do my part, here are nine things I think investors should never forget.
1. Nine out of 10 people in finance don't have your best interest at heart.
Wall Street is a magnet for some of the nation's smartest students hailing from the best universities. And let me tell you: Few of them go into finance because they want to help the world allocate capital efficiently. They do it because they want to get rich.
And the fastest and most reliable way to get rich on Wall Street isn't to become the next Warren Buffett. It's to find people gullible enough to pay outrageous fees and commissions on products that rarely beat a basic index fund.
IBM estimates that global money managers overcharge investors by $300 billion a year for failing to deliver returns above a benchmark index. If you think the regret and shame these managers feel is stronger than the joy they get from driving their Lexus to their beachfront home, I have a bridge -- and a CDO -- to sell you.
2. Don't try to predict the future.
A little more than a decade ago:
- Greece was strong.
- Russia was bankrupt.
- Oil cost $13 a barrel.
- AOL dominated the Internet.
- Smart economists thought the government would pay off the national debt by 2009.
- Apple was a joke.
- General Motors was at an all-time high.
- Mark Zuckerberg was in middle school.
- Y2K was a major worry.
- Fortune named Enron one of America's "most admired corporations."
The coming decade will be filled with just as many shifts. Learning to deal with them is more important than being able to predict them. Because no one -- no one -- will be able to predict them all.
3. Saving can be more important than investing.
This comes from a recent report by ConvergEx Group: "Only 58% of us are even saving for retirement in the first place. Of that group, 60% have less than $25,000 put away."
You can make a lifetime of smart, savvy investment moves, but if you haven't saved enough to begin with, you're not going to hit your goals. As the saying goes, "Save a little bit of money each month, and at the end of the year, you'll be surprised at how little you still have."
Too many people spend too much time stressing over whether they have the right investments or seeking ways to push returns a little higher. Many would be better off if they devoted that energy to figuring out how to save more money. This is particularly true for young investors.
4. Tune out the majority of news.
A 24-hour news cycle is built for people who can't see more than 24 hours ahead. That's why a long, slow, but very important rise in domestic energy production is rarely mentioned, but when the Dow falls 20 points, it is MUST-READ BREAKING NEWS.
Most people's relationship with daily business news should be either (A) nonexistent -- ignore it all -- or (B) something that incrementally helps you understand how the world works but rarely compels you into action.
Atlantic writer Derek Thompson recently wrote:
I've written hundreds of articles about the economy in the last two years. But I think I can reduce those thousands of words to one sentence. Things got better, slowly.
That's all you needed to know. The rest was noise.
5. Emotional intelligence is more important than classroom intelligence.
Take two investors.
One is an MIT rocket scientist who aced his SATs and can recite pi out to 50 decimal places. He uses leverage and trades several times a week, tapping his intellect in attempt to outsmart the market by jumping in and out when he's determined it's right.
The other is a country bumpkin who didn't attend college. He saves and invests every month in a low-cost index fund come hell or high water. He doesn't care about beating the market. He just wants it to be his faithful companion.
Who's going to do better in the long run? I'd bet on the latter all day long.
"Investing is not a game where the guy with the 160 IQ beats the guy with a 130 IQ," Warren Buffett says. Successful investors are those who know their limitations, keep their heads cool, and act with discipline. You can't measure that.
6. Talk about your money.
Investing isn't easy. It can get emotional. It can make you angry, nervous, scared, excited, and confused. Most of the time you make a decision under the fog of these emotions, you'll do something regrettable.
So talk to someone before making a big money move. A friend. An advisor. A fellow investor. Just discuss what you're doing with other people. "Everyone you meet has something to teach you," the saying goes. At worst, they give advice you don't agree with and can ignore. More often, they'll provide prospective and help shape your thinking.
7. Most financial problems are caused by debt.
I have a friend of a family friend who earned several hundred thousand dollars a year as a specialist in an advanced field. He declared bankruptcy in 2009 and will probably need to work well into his 70s. I know another who never earned more than $50,000 a year but retired comfortably on his own terms.
The only substantive difference between the two is that one exploited debt to live beyond his means while the other avoided it and accepted a realistic standard of living. Income and wealth aren't as correlated as people think.
8. Forget about past performance.
Whether it's a stock or mutual fund, one of the worst (but most common) ways to size up an investment's potential is by looking at past returns.
A stock that's gone up a lot in recent years doesn't say anything about where it might go over the next few years. In fact, investments that have done exceptionally well in the recent past should be a red flag, as they have a higher likelihood of being overhyped and overvalued.
You should buy stocks that:
- You understand.
- Have a competitive advantage.
- Sell for attractive valuations.
Past performance should have nothing to do with the decision.
9. The perfect investment doesn't exist.
Gold, often touted as the bastion of stability, fell nearly 70% from the 1980s through the early 2000s. Treasury bonds lost 40% of their inflation-adjusted value from the end of World War II through the early 1980s. Stocks, nearly unquestioned as the greatest investments in 2000, fell 40% by March 2009. And real estate ... well, you know.
Investing is risky. Bad things happen eventually happen to all assets. Valuations get out of whack, industries change, managers screw up, politicians make terrible decisions, and things don't always work out as expected. Diversification is key. As are patience, an open mind, and an ability to ignore crowds and hype.
Got any of your own? Share them below.
Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics.
Fool contributor Morgan Housel has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and IBM. Motley Fool newsletter services recommend Apple and General Motors. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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