In Hinduism, a mantra is a sacred syllable or phraseyou repeat, preferably chant, again and again. Thefollowing are 10 mantras to chant regularly tobecome a successful investor:
1. Keep it simple. Because investors lack the necessaryconfidence, they falsely believe that successfulinvesting must be complex. Actually, most people don'tneed to buy more than 10 or so funds and they don'tneed to trade them often. The more decisions you make,the more wrong decisions you're likely to make. Make itall so simple that you can fit your entire portfolio on 1sheet of paper. Stay away from complex investments likeannuities, hedge funds, options, etc.
2. Beware of inflation. You invest to increase thebuying power of your savings. Inflation is your relentlessenemy in this endeavor. Even modest inflation of3% per year will halve the value of your money in 25years. Thus, you can't put your money under the mattress,in safe money market funds, or in long-termbonds. Judge all investments on the basis of theirpotential inflation-adjusted returns.
3. Don't be afraid to invest in stocks. After the disasterof the past few years, many investors don't wantanything to do with stocks. Most were burnedbecause they invested in stocks the wrong way. Learnto invest the right way and take only the amount ofrisk you can afford. Although there's no guarantee,stock investing is likely to earn you the best inflation-adjustedreturn over time.
4. Diversify broadly. To reduce risk, hold a broadlydiversified portfolio of at least stocks, bonds, and moneymarket funds. Unless you're very knowledgeable andhave a large portfolio, do not buy individual stocks orbonds. Stick to good funds.
In stocks, diversify among large cap, small cap, value,and growth stocks. Possibly add some real estate investmenttrusts and foreign stocks. In bonds, primarily splityour money between short-term bonds and TreasuryInflation Protected Securities (TIPS). Your best bet is lowcost,broad-based index funds in each category.
5. Watch your asset allocation. The risk and expectedreturn of your portfolio primarily depend on its assetallocation. Adjust your portfolio holdings periodically tokeep its asset allocation aligned with the changing conditionsin your life. As you get closer to retirement, yourportfolio should be tilted more toward safer investmentslike short-term bonds and TIPS.
6. Be a long-term investor. Long term is 10 years ormore. Don't put any money you may need sooner intothe stock market. Long-term investing works only ifyou're holding a well-diversified portfolio. Holdingonto a few stocksâ€”especially high-flyersâ€”for thelong term is dangerous.
7. Don't be a stock picker or market timer. Casualobservation and extensive scientific research show thatdespite all the claims you hear, no one can consistentlypredict how any stock or the market will perform in thenext weeks or years. Invest in the stock market by investingin a broadly diversified portfolio of stocks using dollar-cost averaging. Thus, you're tying your fortune to thefuture of the American economy, which is your best bet.
8. Watch your investment costs. Aim for total investmentcosts of less than 1% of your portfolio per yearif you're using an investment advisor, and less than 0.5%if you're investing on your own. Everyone in the financialservices industry tries their best to hide costs. Yourbest bet may be to stick to low-cost index funds. Many index funds hide high costs.
9. Minimize your taxes. Take advantage of all tax-deferralopportunities offered by IRAs, 401(k)s, etc, andreduce taxes further by holding low turnover funds forthe long term. Frequently getting into and out of stocksand funds ends up costing a lot in taxes.
10. Have conviction, discipline, and patience. Yourbehavior is a major factor in your investment success.
Chandan Sengupta, author of The Only ProvenRoad to Investment Success (John Wiley; 2001),currently teaches finance at the FordhamUniversity Graduate School of Business and consultswith individuals on financial planning andinvestment management. He welcomes questionsor comments at firstname.lastname@example.org.