Becoming a Sophisticated Investor: Six Steps

We're almost done with our chapter-by-chapter series on the book Your Money Or Your Life, just a couple of posts to go! You can buy YMOYL here, and you can find the first post in the series here.

We'll return to our more typical food and health-related content later in February.
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Here are six key elements that I believe are absolutely central to becoming a knowledgeable, savvy and sophisticated investor:

1) Understand that the worst lie ever told is "the stock market has a 10 percent average annual return."
Everything about this quote is a lie, including a and the. The days of putting our money into stocks and having it magically double and double and double are gone. The 1990s are over. And the first step towards being a sophisticated investor is to have humility about your investment expectations.

2) Never give your power away to financial advisors, brokers or "experts."
Never allow yourself to be sold investment products by someone else. Instead, choose your own investments, do your own research and have your own reasons.

Note that this doesn't mean a financial advisor can't be useful to you as a source of investment ideas to consider, or as a resource to assist you in properly diversifying your investments. In fact, I've even offered my services on a fee-per-hour basis to help people figure out how to structure their investments and make the most out of their capital. However, you are still responsible for your own money. Know enough to measure your advisors, and never put your financial fate into someone else's hands. To borrow a quote from Your Money Or Your Life: you and you alone are responsible for investing your money since no one cares about the outcome more than you.

3) Get your investing costs down. And keep them down.
Know exactly what fees and commissions you pay at all times and seek to minimize them. Shun complex products where the fee structure isn't obvious. And never pay an up-front sales load to buy into a mutual fund. Ever. Instead, find an index fund or exchange traded fund that invests in the same asset class and pocket the difference in fees.

PS: Read at least one or two books by Jack Bogle in order to wrap your mind around the various pitfalls of the mutual fund industry. Start with Common Sense on Mutual Funds.

4) Never, ever reach for yield.
We all want income from our investments. Duh. But please keep in mind an important Wall Street saying: More money has been lost reaching for yield than at the point of a gun. A big part of being a savvy and sophisticated investor is building an understanding of what types of investments should generate what types of yields. Understand what makes a yield attractive, and what makes a yield too good to be true.

5) Don't be greedy or materialistic with investing, just like you shouldn't be greedy or materialistic with your consumption decisions.
Don't presume that you're some secret king who's going to find the next Cisco, Microsoft or Apple. Forget all that. This is simply not an intelligent philosophy of investing, and investors using this "strategy" are on a fast road to lossville.

Instead, keep things simple: find investments that pay you reasonable income in the form of dividends or interest payments, stay diversified, and patiently build your holdings.

6) Stay liquid. Have more cash available than you think you need. At all times.
This means you will never be forced to sell during a down market or when your investments are deeply out of favor. Instead, you'll have the resources to stand there and buy when everyone else is selling in a panic.

Think back to the 2008-2009 market correction. The market gave you tremendous "opportunities" to panic and sell, and if you were insufficiently liquid during this period, you were most likely blown out of the market--right at the bottom. However, if you had plenty of cash at the ready, you were able acquire amazing income-producing investments at incredible discounts.

Final Thoughts
No single blog post can, by itself, make you into a sophisticated investor. You'll have to do a lot more reading, and you'll have to take ownership and responsibility for developing your own expertise. For those readers who are ready to take the next step towards becoming savvy and advanced investors, I'll prepare an investment reading list to assist you. Stay tuned for our next post.

Finally, readers, what would you add to this list? I want to know.


Next: The Official "Your Money Or Your Life" Reading List





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