PDF By Dan Solin
This is the time for New Year’s resolutions. Most us make them, follow them for a brief period of time, then revert to our old habits.
This doesn’t have to happen with your investing resolutions. They are easy to implement. The problem is taking the critical first step. Stand up and get ready. I am going to take that step for you:
1. Don’t use a retail broker or an online broker, except to implement #2.
2. Do use an online discount broker (like Vanguard, Fidelity, Charles Schwab or TD Ameritade), but only to determine your asset allocation and to purchase a globally diversified portfolio of low cost index funds.
3. Don’t rely on predictions by anyone about the direction of the markets or what to buy or sell in 2011.
4. Do understand that no one can predict random events. If your broker couldn’t call the worst crash in 50 years, and the ensuing rapid recovery, why do you believe his predictive skills have improved?
5. Don’t hold individual stocks, bonds, variable annuities, equity indexed annuities, private equity funds, principal protected notes, high dividend stocks, or options in your account.
6. Do understand that some of the investments in #6 are high commission, high expense products that benefit the seller and reduce your returns. The balance make no sense because you are taking additional risk without the prospect of a higher expected return.
7. Don’t believe brokerage firms that lost billions of their own assets in 2008 are capable of managing yours.
8. Do understand that market returns are yours for the taking and are superior returns.
9. Don’t believe the advertised returns of actively managed mutual funds represent the actual returns investors in those funds achieved.
10. Do understand that most investors achieve a fraction of advertised returns because they jump in and out of their funds, usually at the wrong time.
11. Don’t believe top ranked mutual funds actually deserve that ranking.
12. Do understand that if returns were required to be expressed after taxes, rather than pre-tax, rankings of mutual funds would change dramatically.
13. Don’t believe the “new” SEC is any better than the “old” one. If it was, it would already have abolished mandatory arbitration.
14. Do understand you are on your own when it comes to investing. No government agency will protect you from crooks, scam artists or the daily grist of misinformation fed to you by the securities industry and the financial media.
15. Don’t believe in target prices set by analysts, market timing newsletters, or that any amount of “research” using all those “helpful” screens offered by brokers online will do anything other than encourage you to trade, run up your transaction costs, risk your principal and enrich your broker.
16. Do ask your broker some basic questions about finance which will demonstrate he knows a lot about sales and little about basic principles of investing. Start with: What are the after-tax returns of the mutual funds in my portfolio? Move on to: How does that compare with the after-tax returns of a comparable index fund or ETF?
17. Don’t assume you are a good investor because you were successful in some other occupation. I have written five books on investing, but I call a plumber when the faucet leaks.
18. (The biggest one of all). Do make 2011 the year you fundamentally change the way you invest. It’s not hard. These two books tell you everything you need to know. You can read each one in a couple of hours: The Little Book of Common Sense Investing, by John Bogle and my book, The Smartest Investment Book You’ll Ever Read.
