When creating an investment strategy, the following items apply to almost all investors and can help you maintain a long term perspective that should lead to security and serenity for you and your family.
Keep It Simple:
When investing for the long term, complex strategies, complex investments such as structured products, non-liquid investment products and strategies that take you more than 5 minutes to understand are most likely not suitable and can only be detrimental to your overall financial health.
Get Rich Slowly:
The get rich quick schemes will typically cause two (2) things, cause you to take on too much risk and create loses in your account that you will regret after the fact.
Keep Your Eye On The End Zone:
In this case, the end zone is the point in which you have enough money to create an income stream using only the assets you have. This income stream should provide at least 20% more income on an annual basis than you need to live on. You must out pace inflation and provide for unforeseen expenses ranging from home repair to unexpected health care related costs. You must plan to live a long time in retirement and therefore assume that there will be ups and downs just like there will be during the accumulation phase of your earning years.
Don’t Take Unrewarded Risk
Risk and return are like peanut butter and jelly. They are tied at the hip. The higher the expected return, the more risk you are taking on. Think about it terms of dividend yield. If a dividend seems all too juicy, it most likely is. Those 12% annual dividends seem like a income seekers dream, but they can also be a “value trap.” Beware and make sure you fully understand the underlying security and why the dividend is so high. There has to be a reason.
See The Forest Through The Trees
Focus on the big picture. Don’t be concerned with the daily news stories and day to day movements in the market, a stock or other investment you have. Of course you must be aware of intermediate and longer term trends, but within those trends will ALWAYS be counter trends. The short term noise will drive you bananas if you let it.
Sometimes you will make an investment and immediately experience gains you never expected in a short period of time. Don’t begin to think you’re smart and that you can replicate that activity. Be big enough to know that you got lucky and it could have easily gone the other direction.
Don’t Dwell On The Past – Just Learn From It
You will make bad choices, or receive advise that doesn’t work out the way you obviously intended it to. You must learn from this advice, but don’t harp on it. If you have a sound investing strategy, continue forward and don’t harp on the losers. Sometimes your best loss is your first one. Don’t let a losing investment turn into a portfolio nightmare. Be able to recognize a mistake and move on.
History Can Be Your Best Friend
Historically, everything always reverts back to the mean. Dot Coms and real estate are the perfect example. When investments go up exponentially into bubble territory, be able to recognize the euphoria when you find headlines on the topic every day, people who normally don’t pay attention start to do so and the cover of Time magazine runs a feature story on the topic. Usually that will be closer to the end than the middle or beginning. It may be wise to use these signs as an opportunity to leave the party just a touch early and leave the bottom of the punch bowl for the greedy.
DO NOT rely on anyone else to watch your money for you. It is your responsibility and nobody else cares like you should. At least once a month, take a look at what is happening to each investment, look for material changes and how they relate to the intermediate and longer term forecast. Look for large gainers or losers and make adjustments accordingly.
Don’t Listen To Your Friends
With few exceptions, your friends know less about investments than you do. Anyone who is trying to convince you to buy the next greatest stock is usually wrong and has a vested interest. Don’t listen, they’re never right. (rarely right at best) Stay the course, keep your blinders on and forge ahead.
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