Thoughts to keep in mind when investing
I have files bulging with material that I would like to write about. It sometimes happens that this abundance of clippings and notes overwhelms mylow-tech system for keeping track of all this information.One such item that fell victim to this circumstance was an article by the Wall Street Journal’s Jonathan Clements (Feb. 19, 2006), “Twenty Tips forNo-Nonsense Investing,” which I wanted to bring to readers’ attention many months ago. You’ll recall from last week’s column that Clements is one of my financial journalists targeted for weekly reading.While I’m late in getting to his subject matter, his remarks are, and will continue to be relevant. So, taking the better-late-than-never approach togood investing advice, let’s look at what Clements had to say.I’ve selected ten of my favorites from his list, which I think are of the most critical importance to individual investors:n “You don’t have any friends on Wall Street.” What Clements is referring to is the investment industry’s penchant for making money. Obviously, the more it makes, the less there is for their clients. This phenomenon is the humorous, but accurate, theme of Fred Schwed’s investment classic, “Where Are the Customers’ Yachts? Or a Good Hard Look at Wall Street.”n Investment advice provided by neighbors, relatives, and your colleagues at the office is highly suspect. Clements seriously questions the validity of this type of information and classifies it, for the most part, as “delusional.” Related to these questionable sources, he also includes television’s talking heads and those investment professionals that practice more salesmanship than stewardship with their clients.n There are no “magic” investments. Here, Clements employs the old adage that if it looks too good to be true, it probably is just that. Investment fads come and go, and the more something is promoted, the more likely it is that investors will lose money. Stick to what you know and understand.n “You can control risk and investment costs, but you can’t control returns.” This is a consistent theme in Clements’ investment articles. I’ve found that individual investors concentrate almost exclusively on an investment’s return, virtually ignoring risk. I think the investing public has become more aware of the negative effect of costs and expenses on investment returns, but money still pours into load and high expense mutual funds.n Be careful with commission salesmen that promise market-beating returns. Clements poses the question that “after all, if they are so wise, why are they still working for a living? And if their investment ideas are likely to be so profitable, why are they sharing them with us?” “Sound investment strategies don’t change with the news.” As I have written in this column on several occasions, the financial media tend to focus almost exclusively on the short-term. Investors need to keep their focus on the long-term. Sticking to the tried and true formula of regular investing into reliable performers, such as quality stocks and/or mutual funds, through both up and down markets, will, over the long run, be a winning strategy.n “Your worst investment enemy is often found in the mirror.” Clements echoes the warnings of the research produced on the self-defeating habits evidenced by many individual investors. Behavioral finance studies have proven that fear, panic, greed, myopia, and other emotional traits, can severely harm the performance of an investment portfolio.There’s no doubt that the essence of Clements’ advice is that common sense trumps nonsense when it comes to making smart investment decisions. I would add that legendary investment guru, Peter Lynch, got it right when he admonished individual investors to “learn to earn.”The Investing Wisely column is written by Richard Loth, an independent registered investment adviser who runs Mentor Investing. He is a writer/publisher of investment education materials. His latest book, “Finding Investment Quality in a Mutual Fund,” is now available. E-mail inquiries to email@example.com or call (970) 328-5591.Vail Daily, Vail, Colorado, CO
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