Water Well Journal

August 2015

Water Well Journal

Issue link: http://read.dmtmag.com/i/543740

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Page 49 of 71

I n more than 40 years of investing and writing about investing, I've made enough mistakes of my own and learned enough about the mistakes of others to have put together a few simple rules for profitable investing. I can't promise avoiding mistakes like these will guarantee success, but I do feel that doing so will greatly improve the odds in your favor. Here are half a dozen mistakes ( ) I consider the most important. Go it alone. No, don't try that. To me, trying to pick individual stocks or bonds is a loser's game. Decades of experience shows even full-time professionals do a poor job trying to beat or even meet the market. So why should you think you can do better? Instead, stick with mutual funds, especially index funds (these are funds that set out to track indexes such as the Dow Jones or S&P 500). Buy and sell. Stop doing that. If you insist on picking individual stocks or bonds, never allow yourself to forget every time you buy or sell you're helping your broker get rich. While there are plenty of "experts" around who will tell you the old "buy and hold" philosophy of investing is obsolete, don't believe it. Just ask Warren Buffett, the most successful investor ever. Buy only companies you feel are solid, and hang on to them until and unless there is a major change in the company's fundamentals. As Vanguard's John Bogle puts it, "Buy right and hold tight." Look at the past to predict the future. Don't fall for "the past predicts the future" trap. There is a natural—even understandable—tendency for us to look at an investment's past history as a dependable predictor of what to expect in the future. The trouble is it doesn't always work that way. Experience shows it's not uncommon for an investment to have better- than-average performance one year and mediocre or even dismal performance the following year. This situation is so common the Securities and Exchange Commission issued a directive requiring mutual fund issuers to tell investors a fund's past performance does not necessar- ily predict future results. While the SEC directive refers only to mutual funds, the caution applies equally well to individual investments. The moral of this tale: Don't make an investment solely on the basis of recent past performance; always research the fundamentals as well. Avoid any and all risks. Forget trying to escape risk. There is no such thing as a risk-free place to put your money. While stuffing your money under a mattress will avoid stock market risk, it simply ex- poses your money to other risks—most obviously that old bugaboo, inflation. One year later, the purchasing power of that money will be lower by whatever the rate of inflation. Assuming an inflation rate of 2%, the $1000 under your mattress after one year will have a purchasing power of only $980. Imagine what it will be after 10 years. What about bank CDs or supersafe treasury bills or bonds? While they will be safer than that money under the mattress, they will still be money losers as long as they pay a return less than the current rate of inflation. While stocks carry the greatest potential for loss, they also carry the greatest potential for gain. That's why virtually every financial pro agrees the best formula for potential gain and minimizing risk is a well-diversified portfolio including stocks, bonds, and cash equivalents. Invest like everyone else does. Don't follow the herd. An inherent human tendency is to do what everyone else is doing. Teenagers are perhaps the most dramatic example of this odd behavior (dress the same, talk the same, idolize the same performers) but they're not alone. Have you ever been walking along a sidewalk and seen a group of people staring skyward at some unknown object? If you have, I bet you stopped to look up too. While this sort of "follow the herd" behavior is quite harm- less in most circumstances, not so when it comes to investing your money. When the market is at a peak and everyone else is buying, this may be your time to sell, and vice-versa. Warren Buffett may have summed it up best when he said, "You should be greedy when others are fearful and fearful when others are greedy." Let your emotions be your guide. Keep your emotions out of your investments. No matter how well your portfolio is diversified and allocated, it will WILLIAM J. LYNOTT YOUR MONEY AVOIDING MISTAKES Sidestep these six mistakes and you should be closer to financial success. 48 August 2015 WWJ waterwelljournal.com

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