How do you become a better investor in the market? Should you buy commodities, futures, options, stocks, or bonds? According to Ben Carlson, CFA, he argues that simplicity is the key to a successful investment outcome. These days with so many available choices to invest your money in, the best thing to do is to just buy the whole market through low cost ETFs that allow you to diversify your portfolio. Points taken away from this book:
1. Separate your emotions from your money. Never let them interfere with your decisions. Harder said than done but if you can pull it off, you’ll be taking the money of those who can’t sit still. “One of the biggest mistakes investors make is letting their emotions get in the way of making intelligent investment decisions. Research shows individuals sell winning stocks and hold on to losing stocks. They chase past performance and make decisions with the herd, buying more stocks after a huge run-up in price and selling after a market crash. These errors cost investors a lot of money when compounded over very long time horizons.”
2. Everyone is chasing after the silver bullet with investing, however, statistically your chances of beating the market are really slim. The tried and true path to investing is to let time pass by and to reap your benefits then. “The worst part about successful investing is that it’s relatively boring. Most people are thrill seekers and would rather find their proverbial lottery ticket than have to put in the work to get rich slowly. Wouldn’t life be much easier if that get-rich-quick scheme that seems like it has your name on it actually worked? Unfortunately, the secret to getting rich is that there is no secret. Investors are constantly searching for the key that will unlock the market’s many mysteries that will lead to the easy profits. This is why the bookshelves are full of books that promise to help you turn small amounts of money into millions of dollars overnight.“
3. Only invest in what you know about. “The ability to stay within your circle of competence and understand that which you don’t know is paramount to your success as an investor. You don’t need to have an opinion on everything. There’s no reason to try to invest in every fad investment fund or trend that’s developing. The truly great investors stick to their knitting and stay away from that which they don’t understand or those areas in which they don’t have an edge. When you try to be all things at all times as an investor you end up losing touch with reality because you don’t focus on the important aspects of portfolio management.“
4. There’s a notion that buying real estate is a guaranteed investment. I would argue that there’s no infallibility in life and to put a huge chunk of your equity into a single asset class may not be the wisest decision. “Over the long haul, it’s hard for homes to compete with the stock market in real appreciation. That’s because companies whose shares are traded on a stock exchange retain a good share of their earnings to plow back into the business. The business should grow and its real stock price should also grow through time-unless the company makes poor decisions, as some certainly do. By contrast, real home prices should decline with time, except to the extent that households shell out some money and plow back some of their incomes into maintenance and improvements, because homes wear out and go out of style. Of course there will be those areas in big cities, waterfronts, and popular school districts that are outliers over time if you bought in at the right time and in the right neighborhood. But a house is likely the biggest asset you will ever purchase that requires a significant amount of debt in a single property that’s tied to your local economy, where you also happen to live and work. It can be a huge risk to use only your home to fund your retirement. Plus there’s the fact that you can’t spend your house, so to speak, unless you take equity out of it.
By Ryan Lee
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