I am truly flattered by the number of people who ask me what to do with their money. Most people know that I'm fairly financially savvy and have quite a history of making fiscally prudent decisions. (Although, I have slipped up on occasion; I am a sucker for a rebate.) Over the past few years, I've been asked my opinion on everything from individual stock picks to complicated investment strategies, involving carry-trade leverage, shorting stocks and international real estate (all at the same time). (No, I'm not kidding about this.)
I'd like to be clear on one point: I do not give investment advice. (Unless you want to invest in me . . . financially, romantically, as an employer, etc . . . but caveat emptor, as there are vested interests at work!)
Now that that is out of the way, I do want to share with you a particularly valuable book that I read this week. "The Four Pillars of Investing" by William Bernstein was recommended by a colleague recently; I found this book to be practical and insightful. In fact, I would suggest that anyone with an investment portfolio (which should be anyone who is over 18) should read this book. Here are some of the main takeaways:
You are not smarter than the market. - You are not smarter than the market. You are not smarter than the market. You are not smarter than the market. You are not smarter than the market. This makes sense; the people you're playing against have PhDs from top universities in economics, mathematics, physics and business. They have access to much more information than you or I will ever have. The idea that you or I can beat them at their own game is pure lunacy. Since neither you, nor I, nor your broker, nor your mutual fund manager is smarter than the market, you should never expect to be able to beat the market in the long run.
Minimize your expenses. - The price you pay to have your funds managed is one of the only things you can truly control about your portfolio. I'll be honest, for the past few years, I have been getting fleeced by Fidelity in my retirement account; I've been paying almost 2% in fees and expenses on everything I own. This will change in the near future, as I am moving to no-load, low-management-fee, low-expense mutual funds.
Have an asset allocation appropriate to your nerves. - I'm looking at rebalancing my portfolio to an 80%/20% stock/bond mix. If you're thinking, "WHAT?!? Stocks?!?! In this market?" then you probably should have a mix more slanted toward bonds. If, on the other hand, you've seen the recent market downturn as a buying opportunity (I have), then you might think about being this aggressive. In every case, you want to be able to avoid getting nervous and selling out after the market has tanked, because you'll only be making your losses real.
Investing should be boring. - Jim Cramer can kiss my butt. Managing your nest egg should not be exciting and I generally am going to prefer a portfolio with just a few asset classes, rebalanced annually. Honestly, I have many more exciting things going on in my life; I'd much rather focus on my trip to Japan at the end of December, than worry about whether I have too much money in the Whateveristan Small Cap Technology Growth Fund.
Of course, this book contains much more than the three points, so go and get yourself a copy. (The Des Moines Public library should have a copy available in about a week.) Happy investing!