Money Mastery in Five
Making money is a lot more simple than we'd like to believe. Just a few simple concepts will put you miles ahead of most investors. Here are my five top tips.
First, there is no such thing as making lots of money with little effort and no risk. There is always a price to pay be it through our individual efforts or the various risks we take. If you want to make big bucks, you had better be prepared to lose.
Next, once you truly realize that risk is a prerequisite to making money, learn what risk is and how it can be both turned into something more palatable and managed. Example: Buy one stock, and you have taken on the risk of total loss. Buy all of the stocks in the world, and you have effectively removed the risk of total loss and turned it into simple volatility.
Volatility can be managed by investing is assets that have tended to zig when others zag and avoiding those which have failed to reward their added volatility with higher returns (like 30-year bonds).
Third, It’s time to get over yourself and stop believing in the "stock fairy." Neither you nor anyone else can actually predict the future. Sure, it may seem like it sometimes, but those seemingly accurate predictions were either lucky or contrived. Believing in future forecasts is so 15th century.
Four. Want a sure fire way to increase returns from your investments? It’s easy. Reduce costs. Stop paying 5% commissions, know that the only thing an active manager does for your portfolio is increase costs. If you’re a do-it-yourselfer, stick with the cheapest no-load index or passive funds. If you need an advisor, make sure they charge less than 1% per year and never use expensive, active mutual funds (particularly those with 12b-1 fees).
Number Five. Control your emotions. The world is not about to end. However, there has never been a shortage of prophets of doom… and they’ve been consistently wrong for thousands of years. It’s highly likely we’ll muddle through whatever crisis we have at any given moment, and if we don’t, your portfolio will be the least of your worries.
There may be a few other simple steps to becoming a better investor, but if you just master these five steps, you’ll be better off than most