"How do I become a betterinvestor?" There isno definitive answer,but the place to startwould be: Stop consumingjunk investment advice.Most investors think that they canimprove their investment knowledgeand performance by consuming as manyinvestment books, magazines, newspapers,and CNBC shows as possible. Inreality this is not only a huge waste oftime, but it can also be counterproductiveâ€”or even dangerous. The key problemis that most investors do not knowenough about investing to cull the fewmorsels of investment wisdom that areburied in all that junk.
What it takes to be a successfulinvestor has not changed much. Butbooks, magazines, newspapers, or TVad spots aren't sold by repeating thesame few pieces of healthy advice. So, allthese sources have to put out a lot ofjunk advice, sensationalize daily marketfluctuations, and endless speculationabout which way interest rates aregoing, etc. If you want to save yourself alot of time and agony, and improve yourinvestment performance, here are fourapproaches you should consider.
1) Rely on just one good investmentbook. If you really want to learnabout investing, identify one goodinvestment book, read it cover to coverat least three times with a yellow highlighterin hand, and then religiously followthe author's advice.
Don't read this book casually whilewatching TV or listening to music. Youshould be reading it as if you will have topass a test on the materialâ€”study thebook. If you are not willing to make thateffort, do not jeopardize you and yourfamily's future by managing your life'ssavings following advice you gatherfrom here and there. Recognize that theauthor of a good book has synthesizedinformation from good investmentbooks and research work available foryou. You do not need to nor can youduplicate that effort on your own.
The Four Pillars of
The Only Guide to a
Winning Investment Strategy You Will
The following are two books I highlyrecommend: (Barrons; 2002) by WilliamBernstein and (St. Martin's Press; 2004) byLarry Swedroe.
2) Invest in just three index funds.If you do not have the time and interestto truly learn about investing, then youcan do fairly well over the long run byinvesting in the following three indexfunds with proper asset allocation, ortheir equivalents: The Vanguard TotalStock Market Index fund, the VanguardTotal International Index fund, and theVanguard Short-Term Bond Index fund.
3) Invest in a life-cycle fund. If youwant to delegate the responsibility ofdoing the asset allocation and adjustingit over time, you can invest in a life-cyclefund with a target date close to yourplanned retirement data. These fundsallocate your money to a handful ofindex funds and adjust the mix over theyears as you approach retirement. Thegood thing about these funds is thateverything happens automatically. Soyou can neither forget to make the necessaryadjustments, nor can you makeemotional decisions based on the market'sups and downs.
4) Work with a financial advisor. Ifyou do not think that you will be able topursue one of the first three approacheswith discipline and patience, then youshould find a knowledgeable financialadvisor who charges a reasonable fee,and then rely on them. Do not keep second-guessing them and measuring theirperformance every month, quarter, oryear. If you find the right financial advisorat the right price, they will most likelybe able to outperform the above threemethods after deducting their fees.Viewed that way, the investment managementwill cost you nothing or verylittle. But the key is to find the right person.So if you decide to take this route,put in a lot of time and effort. If you doit right the first time, you may not haveto do it again for a long time.
The Bottom Line
â€¢Don't spend your energy seeking outevery bit of haphazard financial adviceclogging the airways.
â€¢Simplify your investing with indexfunds or a life-cycle fund.
â€¢Seek the advice of a reputable advisor.
Chandan Sengupta, author of The OnlyProven Road to Investment Success (JohnWiley; 2001) and Financial Modeling UsingExcel and VBA (Wiley; 2004), currentlyteaches finance at the Fordham UniversityGraduate School of Business and consults with individualson financial planning and investment management. He welcomesquestions or comments at firstname.lastname@example.org.