Principles of Sound Investing

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Over the next couple of weeks or so, I will be updating some material I’ve published previously about sound investing. I will also be posting it on my wiki, “Savvy Investor,” which is under construction.

The number of Americans who have investments of one kind or another is now very large. The number who base their investment decisions on well-thought-out principles is undoubtedly much smaller. Many people are bewildered by the whole subject of investing, and either make decisions haphazardly or let someone else make their decisions for them. Often they pay a heavy price in the form of poor returns or unnecessary fees.

The information you need to be a good investor is not as hard to acquire as you might think. Just as you don’t have to be a French chef to cook a good dinner, you don’t have to be a Wall Street analyst to make money in stocks and bonds. (And as we’ve seen recently, the most highly paid analysts can get carried away with greed and make really dumb decisions.) Yes, there are some very sophisticated technical tools for addressing certain questions, such as the likelihood of achieving a particular financial goal with a particular combination of investments. But what is more essential is a set of basic investment principles that have stood the test of time, such as regular saving, risk management, diversification, and tax sheltering. Most people have had at least a casual exposure to these notions, and yet Americans continue to save too little, put too many eggs in too few baskets, or pass up attractive tax breaks. What too many people have failed to do is consciously embrace sound principles of investing and incorporate them into a systematic investment strategy, so they become financial habits to be followed routinely. If you can do that, your chances of long-term success will be greatly improved.

The principles of sound investing I’ll be discussing sound very simple. They include things like living within your means, diversifying your investments, avoiding unnecessary fees and expenses, sheltering returns from taxes, and planning for a long retirement. To some extent, you probably already know them. What I’ll be trying to do is give you more insight into what the principles really mean and how they come together to form a solid investment strategy.

Of course, a set of general principles is not the same thing as a detailed financial plan. Your specific investment decisions–what you should actually buy, hold or sell–depend on your particular financial circumstances. Once you have a general strategy, you can decide whether you can take it from there and work out the details yourself, or whether you would like some personal financial advice. If so, you may find it most economical to pay only for a few planning sessions, while avoiding more costly management fees and commissions. Most people who have a sound investment strategy can manage their own investments most of the time, with occasional advice from a financial professional. In a later post, I’ll discuss a few different ways of obtaining that advice.

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