The 12 best retirement investing lessons
Reprinted courtesy of MarketWatch.com
Published: Aug. 28, 2013
To read the original article click here
It’s easy to get wrapped up in the specifics of whatever you’re doing and lose sight of the important principles that should dictate our choices and that will influence the outcome of whatever we do.
So today I want to share 12 important lessons I have learned about investing. I keep coming back to these concepts and principles again and again to keep myself — and my readers — on course.
One: I don’t know the future and I cannot know the future. Neither can anybody else. When I was young, I believed in a lot of experts who thought they could know the future and take advantage of their knowledge. Their arguments were so convincing that I followed them confidently. Time and time again I wound up being surprised — sometimes even stunned — to find out how different the real future was from what the experts had predicted.
Two: The best guide to the future that I’ve found is the past. The past provides probabilities. If a certain course of action has failed 90% of the time, it is sensible to believe it will continue to do so. And if another course of action has succeeded 90% of the time, it’s likewise sensible to think it will continue to do so.
The trick is to find the “right” past on which to focus. One excellent example for investors is outlined in one of my previous columns. There you will find evidence so strong that serious long-term investors would be foolish to ignore it — yet many do.
Three: I have learned to focus on the things I can control and leave the rest to play out, as they certainly will, in an unknown future. What can I control? Expenses, taxes, turnover costs, diversification, asset class selection, to name a few. Most of the rest of what the media focuses on is only noise.
I can also control (to some degree, at least) my emotions and my expectations and my discipline. I have learned that it’s extremely worthwhile for me to do so.
Four: No matter how carefully and thoroughly and wisely I make a plan for my investments, almost everybody on Wall Street has a better idea. Those better ideas almost always result in profit for Wall Street, regardless of whether they do me any good.
Wall Street wants to make friends with me (and my money) for life. I’m all in favor of having friends, but investing should be a business relationship, not a friendship.
Five: Most investors aren’t prepared to deal with the emotional turmoil of the markets. The ups and downs of the market lead people to want to buy and sell at the wrong times, and many investors do just that. Collectively, the results are awful, as reported year after year by the DALBAR study.
This leads to two practical lessons. First, set up your investments so they are properly diversified, using the services of a savvy professional adviser. Second, don’t waste your time watching and reading the financial news or frequently checking your account balances.
Six: This might surprise you, coming from somebody who tries to control everything that can be controlled: I have learned that luck has a bigger impact on lifetime returns than most people are willing to admit. I know a couple who sold most of their investment portfolio in order to buy a house while they waited to sell the place they had been living.
All the conventional wisdom would advise against doing that. But as it turned out, they avoided the sudden stock market crash of 1987, which wiped out trillions of dollars of investments in only a few hours.
After their house sold, they invested the proceeds and went on to ride the next great bull market with 30% more money than they would have had if they had followed the conventional wisdom. This wasn’t good strategy. It was pure luck.
Seven: Over and over again I have seen investors focus almost exclusively on the great results they hope to get. That’s where Wall Street wants our attention.
But that’s essentially a waste of our time and energy. If your investment is successful, I guarantee you won’t have trouble accepting that success.
Instead, focus on the potential loss you could face if things don’t go as you expect. For example, any individual stock can lose most or all of its value, regardless of how good the “story” is regarding its products or management. A diversified stock fund, on the other hand, has an expected loss of only 50%.
Eight: The most common problem investors run into is taking too much risk — often without realizing it. I have learned how important it is to pass the baton of risk to other investors. It’s very easy to do that.
In my free e-book “101 Investment Decisions” is a list of 10 ways to figure out how much risk to offload to others — in other words, how much of your portfolio should be in bond funds.
Nine: Speaking of risks, I have learned never to take a risk unless I’m likely to be financially rewarded for doing so. For example, buying a large-cap growth fund exposes you to the risk that you could lose half (or more) of your investment — yet the expected return of growth stocks is less than that of the Standard & Poor’s 500 Index SPX, 0.58%. On the other hand, a large-cap value fund exposes you to the same risk but offers three additional percentage points of long-term expected return.
Ten: I’ve learned the value of one-day liquidity. If I have to wait weeks (or even months) to sell an investment, I’m going to be frustrated and feel as if I have lost control. When illiquid investments go bad and many people want out at the same time, the predictable mechanics of supply and demand can rob these investments of much of their value.
When you encounter an illiquid investment, it’s almost certainly something that was designed primarily to benefit Wall Street.
Eleven: Because emotional buying and selling decisions can be an investor’s worst enemy, I have learned to make the process as mechanical as possible. This means automatic savings and investing when you’re accumulating assets. This means automatic withdrawals in retirement, giving you a regular, predictable income. And this means automatic rebalancing regardless of what the market is doing and how you’re feeling.
Twelve: I have learned that 99.9% of successful investing is about defense, not offense. This means avoiding the loss of the money you have saved and the gains you have made.
In sports, the experts have a saying: Offense wins games, but defense wins championships. I believe the same is true with investing.
Richard Buck contributed to this article.
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