5 Secrets of Investing
April 24, 2008 by Elizabeth Potts Weinstein
- Expenses are everything. Whether you are trading stocks, buying mutual fund shares, or investing in real estate, you will win or lose based upon the fees and expenses. You must evaluate not just the initial purchase commissions and charges, but also reoccurring maintenance fees, upkeep, insurance, and opportunity costs.
- To know if you are getting a good return you must know if your investment is passive or if you are in business. If you are investing in mutual funds, your 401(k), or in a business you don't run or manage, you are making a passive investment and can be sufficiently rewarded by a moderate return. If you are researching & trading stocks every day, managing rental real estate properties yourself, or overseeing a franchise, you are running a business and need to get a great return to make the additional risk & time worth your while.
- Asset Allocation is 90% (or more) of return. Don't worry as much about picking the perfect stocks, bonds, mutual funds, or indexes. Almost everything comes from having a well-diversified, annually rebalanced portfolio that is allocated in the right percentages, in the right categories (i.e., large caps, bonds, international).
- Simple is better. Yes, there are dozens of asset categories and tens of thousands of mutual funds. I commonly see brokers put clients into 20 or even 200 different mutual funds. More is not better. It just means that you are unable to manage your own money and your fees go up (reducing your real return). I usually use just 4 asset classes with one or two funds in each category, and get the same (if not more) return.
- If it's too good to be true, it probably is. Many of the trendy investment seminars and schemes are not appropriate for you. A few of them are ponzi schemes, where the high returns (usually like 20% per month) are paid out from the principal of new investors not based upon any real profits — yes, I personally know people who have been bankrupted by these schemes. Some are legitimate sophisticated techniques that will work for some people who are willing to take a lot of risk and spend time on the business (i.e, foreclosures, option trading), but most people will not be successful. If you are thinking about one of these programs, send us an email and we'll give you a reality check.
Take Action
Review your investment portfolio to see if you are violating any of the above secrets.
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