The Basic Tenets of Investing

From time to time, when things seem a little directionless in the market – like right about now with Wall Street bankers taking off for the summer, European policy makers heading off on that very-European luxury of six-week paid vacations every year (sounds nice, doesn’t it?!) and with general economic uncertainty here at home with conflicting reports on growth versus unemployment and so forth – it helps to step back and remind ourselves of the basic tenets of investing and reinforce key fundamentals so we do not lose track of our investing goals.

So here are a few things to bear in mind:

• Know your investment goals and set bench-marks to track performance 

#1. Be crystal clear about your long-term and short-term investment goals and set bench-marks to measure your performance for each goal.

For example, one of your goals, very simply, could be to increase your retirement contribution by $100 every quarter. Well, track this goal, look back and see when you slipped – if you’ve been on track, that’s very reinforcing and you’re doing well; if not, see if you can set aside make-up investments.

You know, while everyone sees the logic of this, very few actually get around to doing this themselves… life, or that football game you must watch, just sort of get in the way.

Set aside a small amount of time every month to review your investment goals. Set benchmarks against which you can measure your progress. Track these things in simple buckets and make positive corrections as needed.

If you have trouble getting started, search the web with keywords such as investment planning, investment planning tools and so on to make this a little easier. If you get to this on your own, great! If not, that’s great too because then you’ll know that bringing in outside help makes sense – so go out and choose a good investment advisor.

• Trust your gut and make investments that let you sleep well at night

# 2. If you invest on your own or though an advisor, ask questions if something goes against your gut. And remember, it’s your money, so do not let anyone rush you or push you into an investment you’re not comfortable making.

Pick an advisor who helps you sleep well at night, not someone who promises you great returns but has you tossing and turning at night with knots in your tummy. And be aware that there are some advisors who will want to push you into questionable investments because they are paid higher commissions to do so… so do not succumb or get suckered into a promise of out-sized riches. If something sounds too good to be true, question it!

• Following the crowds is hardly a winning strategy in investing

#3. Remember the dot-com boom and bust??  Just because it’s sexy and everyone’s talking about it, don’t go off and do it – especially with your investments – don’t get swayed. While there is comfort in following the herd, do so only if it makes complete sense… else choose to just sit out the innings and focus on not losing any money.

As Warren Buffett said, “Rule #1: Don’t lose money. Rule #2: Don’t forget Rule #1.”

Typically, when we join herds, we stop thinking for ourselves and that could lead us to breaking Rule #1… and that’s something you should avoid at all costs.

That said, Buffett himself has admitted to losing money on several deals… so if your stock or portfolio is down a little, do not despair… keep your cool and focus on setting it right – preferably with a qualified investment advisor by your side so you don’t make more mistakes in the emotional mindframe of having lost money.

• Protect your portfolio from you yourself. Don’t let your emotions get in the way.

#4. Protect yourself from… well, yourself! Many investors believe in themselves to the point where they make the most basic investing mistakes and get too emotionally involved with their failures.

In fact, when pediatricians are asked if they’d treat their own babies, the overwhelming majority says “no” because they fear they’ll lose objectivity.

It’s sort of the same with your money… if you yourself invest it, you often times lose objectivity and make emotion-driven decisions that deliver small body-blows to your portfolio.

For example, you may feel like selling a beaten down stock but your advisor might remind you why you bought it in the first place and perhaps encourage you to buy more. Or, losing money on an investment may prompt you to gamble more of your good money to recover your losses and this, more than likely, could make things worse. So save your portfolio from yourself, be as objective you can be, or consider hiring an expert.

Oh… and try not to hang on to every little tidbit of stock-related news or have 5-minute quote alerts sent to your smartphone. If you invest in a company, don’t let daily stock variations bother you – stay invested for the long run and keep abreast of key news items that impact each company in your portfolio so you’re not caught off guard.

And on this portfolio monitoring point – again, most folks just do not have the time or the investing discipline to monitor a well-diversified portfolio – so consider letting professionals do it.

If you want to play the market, as a lot of investors like to do, set aside some play money – no more than a few hundred or thousand dollars, and play with that as much as you like. But ration this to yourself like pocket money so you do not end up digging into your other resources. Keep your play money to a small fraction – say 1% to 3% – of your overall net worth.

And on your stock market play-money, make sure you don’t bring down the bank! Understand the risks of what you’re buying or selling. Understand that a simple short sale can result in huge losses if the stock moves against you. Cut your losses and get out quickly if you make an error in judgment.

I can go on but I think you get the picture. Focus on your long- and short-term investing goals, review your goals at least once quarterly, protect your portfolio from yourself, consider hiring a trusted advisor, don’t get overly caught up in trends and news bites, and never take your eye off the ball that is your portfolio and the road that is the market.

Happy bouncing!