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11 Ways to Be a Better Investor

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By Money Manager – Tom Cock

Don’t allow anyone to sell you investments, period! Good investments don’t need to be sold. Some of the worst investments on the market are those offered by professional salespeople, such as stockbrokers and insurance representatives. Even in those rare cases when they might be selling you a decent investment you will almost always sacrifice some of your money in the form of a commission.

Avoid hot tips. I have never met a soul who made money off of a legitimate hot stock tip. I don’t doubt that it occasionally happens, but most of the time you are either setting yourself up to be ripped off or are participating in illegal activity. It’s important to know that acting on “insider information” can result in criminal liability, even in cases where the recipient of the information was unaware of its source.

If you do need help, hire a fee-only financial planner. No matter how good a financial advisor might be, it is difficult for someone to always look out for your best interests where a possible commission is involved. A fee-only financial advisor is paid to look out for your best interests, and is less likely to be influenced by the chance for additional compensation. For this reason, “fee-based” advisers should also be avoided.

If you don’t understand an investment, stay away. Real investments are rarely complicated. It’s the bad ones that will drive you insane with their complexity. The reason is simple; if you don’t understand it, you need to hire someone to help you. In addition, the complexity and confusion can also allow the creator of the “investment” vehicle to skim off a lot of extra money for their benefit, without you knowing (because you’re too confused to know).

If it sounds too good to be true, there’s a catch. While it is always possible that a wonderful sounding investment might actually work, it certainly is rare. The very recent past has provided us with the perfect illustration of this tendency. Those who invested with Bernie Madoff were offered an investment with returns far higher than any other safe investment vehicle. In other words, when CDs are paying 4% interest and someone offers you 12%, you can be pretty sure that the offer is “too good to be true.”

A real investor is someone who develops a plan for their future, tries to understand their personal tolerance for risk, and carefully crafts a portfolio to meet those needs. Real investors diversify across various markets and business sectors because they don’t know which part of the economy will do well and which will stumble.

Diversify. Diversify. Diversify! Just as the word “location” deserves to be repeated in the real estate business, the word “diversify” warrants repetition, when it comes to your investments, unless you enjoy losing money. Lack of diversification turns investing into gambling. If you don’t believe me, just ask any of the people who had the bulk of their money invested in Enron, WorldCom, any of the airlines, and now, the entire financial industry. You can never know when a company or sector is about to stumble or fall.

Rebalance. One of the most difficult things for investors to do is to “sell high.” It’s even harder than it is to “buy low.” You know it’s true, it is always easier to buy stocks when the stock market is rising and tough to do when the market is plummeting. On the opposite side of that same point, we hate selling our “winners.” Rebalancing our portfolio forces us to sell those investments that have been rising and purchase those that have fallen. In other words, rebalancing forces us to sell high and buy low.

Never pay a load. Don’t let the salespeople fool you, a load (otherwise known as a commission) does nothing to make an investment better. The load does not go toward better management or superior advice, it is merely the means by which a person selling the product makes a living. Because investors have become more savvy about front end loads, the investment and insurance industries have grown increasingly adept at hiding these onerous charges. For that reason, it is important that you both ask if there is a commission being charged, and read all of the provided literature to make sure your “advisor” is telling the truth. Loads never make you money and always negatively impact your investment.

Watch the fees. There is really only one way to improve your return on your investments with any degree of certainty. Pay less. It’s so simple and yet so often ignored. If you have two identical mutual funds, the one charging the lowest fee is either going to provide the highest return. Given that fees go to pay for management of mutual funds, you might think that paying more will get you better managers and higher returns. Historically, that has not been the case. All things being equal (and, over a long period of time they tend to be), when you pay less you make more.

Control your emotions. This is the most difficult part of becoming a better investor, but is the most important. Emotions are the biggest detriment to successful investing. When the news is bad, we want to run from our declining investments and hide in something safe. When times are good, we envy those who are doing well and get greedy. Our emotions drive us to buy high and sell low when we should be doing the exact opposite.

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