Many of you have read or heard my financial philosophy, but I think it bears repeating:
My Finacial Philosophy: The truth about investing is that what most people need for an abundant life, an abundant retirement, is very easy to understand, but not so easy to put into practice. Unfortunately, most of the financial industry advertises that investing well means intellectually understanding arcane knowledge, mysterious charts, or the proclamations of gurus. Here is what actually works:
As everyone knows, it is best to avoid putting all your eggs in one basket, or putting all your money in one stock or one bond. But it is also important to spread your wealth into many different asset classes, including small and value stocks, all of the world’s markets, and low-risk bonds. The markets can move in ways no one expects, and diversification is the wise response to an unpredictable world. Through effective diversification, you can lower the risks your portfolio faces while increasing the expected returns.
2). Understanding Risk Tolerance
All investments carry some sort of risk, and the risks can be short or long term. Diversification reduces but cannot eliminate risk, so it is crucial to achieve clarity about how much risk you can take. On the one hand there is the risk you can economically afford to take, and on the other hand is your psychological tolerance for risk. The key is to balance your risk tolerance with the goals you have for your portfolio.
3). Staying the Course
Unfortunately, most of the mistakes investors make are encouraged by too many in the financial services industry:
Stock Picking- In a world with thousands of agents all competing with each other, and where information is disseminated so rapidly, picking individual stocks is not worth the expense or time.
Relying on Past Performance – The past does not predict the future. Sound investing strategies do not rely on past performance, especially recent past performance, for anything other than illustration.
The great difficulties in investing are emotional and behavioral. The single biggest problem with such mistakes as market timing and stock picking is these unrewarding, speculative activities distract from real investing. Life is complex enough. Keep the building blocks in your portfolio