Dec 26
Five Rules of Investing
Rule #1: Develop a Portfolio Policy. While there are many sub-rules within this fundamental rule, at least begin with some sort of policy. This may require a lot of reading and I recommend a number of good books on this site. Put in the advanced time reading and it will save you heartache and thousands of dollars over a lifetime. All investment books are not useful so follow strict reading guidelines.
Rule #2: Follow “The Golden Rule of Investing.” Save as much as you can as early in life as you can — and continue to save. Understand compound interest. This rule includes getting out of debt, paying off credit cards every month, and learning to be a miser when it comes to spending money on frivolous items.
Rule #3: Face the fact that there is a very low probability you will outperform the total stock market. Recognize this fact early in life and become an index investor. Avoid picking individual stocks unless you are an elite investor.
Rule #4: Learn the power of Asset Allocation. Develop a well-diversified portfolio that covers all the major asset classes. Study the concept of correlation and build a portfolio around low correlated asset classes.
Rule #5: Learn how to monitor and maintain your portfolio. This includes learning how to track the Internal Rate of Return (IRR) for both the portfolio and an appropriate benchmark. Understand the concept of risk and work it into your portfolio monitoring model. Come up with a Return/Risk ratio as we have built into the latest version of the TLH spreadsheet.
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