Here's a question from Claude:
Comments: Hi John, thank-you very much for posting your insights, I really appreciate your point of view - your insights don't require me to go into suspended disbelief unlike the mainstream financial press.
I was reading your 7 secrets post and have had several discussions with my wife this week regarding finances and a question came to mind I was hoping you could help with. Specifically - it seems that coming up with goals (and ultimately a plan) involves some level of financial expertise that we don't have (we're in our early-30s and not clear what our expenses are going to be 25yrs from now). Do you suggest leveraging books/internet to work through that, or should we find someone like a financial planner to go through this? Thank-you and regards, Claude.
Claude
I really think you can handle your own investment plan. I will give you a few ideas, and below I have enclosed an article I wrote on the subject a few years ago. Here are some tips.
1)Buy The Wall Street Journal, Guide to Understanding Personal Finance. This simple and easy to understand guide is available at most bookstores, and sells for $15.95. This guide is very easy reading, and you can use it as reference guide.
2)Go to www.money.com , in the left column go to calculators, click on retirement planner and start plugging in your financial numbers. After that, click on savings calculator, and that will tell you how much you need to save and what return you need to generate to achieve you goals.
3) After you find out how much your going to need for retirement, fill out the "risk profile" which will determine what asset allocation model best suits you. If your risk tolerance is less than what is called for to achieve your goals, you might have to take more risk (more $$ in the market) to meet your goals. 4) Once you get your model, you need to allocate your assets accordingly. Keep in mind as you get older, and closer to your goal, you need to re-allocate your assets to a more conservative mix (more income, less stocks).
4) Follow the "7 Secrets" guide to make sure you are saving as much as you can, and not spending too much. I know its hard not to keep up your neighbors spending habits, but you'll live to thank me one day.
***By the way, I am working on a book on the "7 Secrets". I really think this advice is a must read in today's spend thrift society. Let me know what you think.
HOW TO BE YOUR OWN BROKER: Know Thy Self
I think most investors should learn how to be their own brokers. Dont worry it is not difficult at all. In fact you would be surprised by the number of brokers who had no prior investment experience before joining a brokerage firm. In fact, brokerage firms frequently hire people with little or no previous experience. Brokerage firms train their brokers for about 6-10 weeks then cut them loose on people like you. I feel you can have yourself trained in no time. Now, why do we want to do this? I can give you thousands of reasons, one dollar at a time if you wish, but Ill spare you the boring details and cut to the chase.
1)First Reason Wall Street is not a moral place, and no one will care more about you than yourself. Brokerage firms have proven over and over again they cannot be trusted, and some no longer deserve your business. Your broker may be a fine, upstanding person, but if the firm they work for was mentioned in the global securities fraud settlement, I would not allow the firm to have another dime of my fees and commissions. In fact, it is my opinion that any firm participating in investment banking activities should not be allowed to deal with the small investor. Below is a list of the firms involved in the securities fraud settlement: CS First Boston, Goldman Sachs, Merrill Lynch, Morgan Stanley, Smith Barney, UBS (Paine Webber), Bear Stearns, JP Morgan Chase, Deutsche Bank, Lehman Brothers, Piper Jaffrey, Thomas Weisal Partners.
2)Second Reason- You will save thousands in fees and transaction costs. Unless you want to pay somebody hundreds, maybe even thousands of dollars to say, oh dont worry, everythings going to be ok, I would seriously consider investing on my own. If a person constantly needs to have their hand held, more than likely they have no business being in the stock market.
3)Third Reason- Investments dont need a 24 hour baby sitter. Ive heard the argument that an investor wants someone whos going to watch their investments for them. Why? The investments are not going anywhere. If youre an active trader, I can see why you would want a market baby sitter. But if your not, dont waste your money.
4)Fourth Reason- In a very short period of time, you will be as knowledgeable, and maybe more knowledgeable than most first year brokers.
5)Fifth Reason- its fun and easy. You are really going to enjoy the learning process as the months unfold. Keep a separate notebook and take notes like you would if you were outlining a chapter for school. This will also help you with the learning process.
Below, I have also listed my "Top 10 Mistakes Most Investors Make"
"Top 10 Mistakes Most Investors Make"
1. No written investment plan - Lets say you live in Florida and you were driving to Montana for a vacation. I would venture to say that the first thing you would do is look at a map and plan your route. You might even plan a few stops along the way to site see and make a few hotel reservations in advance. Investing is no different.
A written investment plan is no guarantee for success, but studies have shown that investors who have written plans have a better chance for success than those who dont. A written plan forces an investor to be disciplined and focused on a goal or destination. Like a roadmap on a trip, if you should go astray, a written plan will put you back on the right path.
2.Poor Diversification- Asset allocation seems to be the chorus screams from the brokerage firms today. Youre a little late to the party guys. We didnt hear these screams during the Hey Days of the NASDAQ bubble. The truth of the matter is, asset allocation has been around a long time. Could it be that investor greed clogged the ears of investors during the late 1990s?
Harry Markowitz won a Nobel Prize for his work on portfolio diversification through a study called the Modern Portfolio Theory or M.P.T. The basic premise of MPT is that a proper diversified portfolio can limit your risk and enhance your return. The longer the investors time frame, the less risk is involved, and vise versa. A portfolio properly allocated between cash, bonds and stock obviously has less risk than a portfolio in just stocks, bonds, or cash.
Investors need to identify their future financial goals, the time frame for achieving those goals, and the proper diversification.
3.Trusting brokers and their firms -The financial services business is not a charity organization. Whether youre dealing with a bank, brokerage or insurance company, their first loyalty is to the shareholders and themselves. This is very obvious by the fees and commissions you are charged.
If you know what youre doing, you can save a ton of money in investment costs. The more you save, the faster you will reach your financial goals. The more you know about the various products and services offered by a financial institution, the better off youll be. You do not need to let brokers, insurance companies, or brokerage firms tell you whats in your best interest.
4.Taking tips from friends- Friends often mean well, but often their enthusiasm is misguided and passed down. The lure of a hot tip plays on many investors urge to Hit the big one even though most never pan out. Unfortunately, too many investors have to learn the hard way, and lose money. Since there are no safe shortcuts, investors need to realize that Hot tips rarely pan out.
5. Procrastination- Investors waiting for the right time to invest may be waiting an entire lifetime. Te reality is, there is no right time to invest. No one can predict future events, good or bad. No one rings a bell when a bear market ends, and by the time a new bull market is declared, its too late. Proper diversification can cure some forms of procrastination. But, the longer you wait, the longer its going to take to achieve your goals.
6.Taking too much risk- Some investors feel a lot of money in a few investments provide a greater return than a well-diversified portfolio. This is not the case if one of those few investments was Enron or WorldCom. In reality, no one knows they own an Enron or WorldCom until its too late. Even the rich oilman, J. Paul Getty, once said, Put all your eggs in one basket, but watch the basket. Since you and I do not own a couple of thousand oil wells, that philosophy does not apply.
People who speculate are forgetting about a precious commodity that we all share for only a while. Time. Time is on our side as investors, and against us as speculators.
7.Micro-managing your investments- One of the biggest mistakes investors make is theyre too jumpy. They jump from one investment to another because they do not receive instant gratification from their investments. These investors allow fear and greed to determine their next move. In the long run, this causes investors to sell too soon, and not buy something until its too late. A properly diversified portfolio with quality investments needs very little day-to-day management. True, the time will come when the percentages of a plan need adjusting, but this takes place as allocations become disproportionate, and not because an investment is temporarily out of favor.
8.Not enough funds for emergencies- From time to time, events occur in our lives that call for a change of plans. These events may involve being laid off, fired, death in the family, or a host of other reasons. Financial planning guides call for having cash reserves to meet any unforeseen events that may unfold. The usual recommendation is to have three months of pretax income reserves available at all times. My recommendation is to have six months of pretax income reserves at all times. The six months of reserves gives you enough time to make any necessary life adjustments without interrupting your long-term investment plan. Do this, and youll be able to handle almost anything that temporarily disrupts your life.
9.Believing financial publications- Weve all stood in lines at the grocery store or WalMart and scanned the eye catching headlines on a Fortune or Money magazine. All too often, we are captivated by headlines like The 10 Best Mutual Funds or The One Stock You Must Own Now. More often than not, if youre reading the headline, its too late. These headlines are cleverly worded to capture a persons attention and to sell magazines.
It is been my experience that the funds and stocks touted in these publications severely under perform or drop like rocks over a period of twelve months. After reading one publications recommendation, I did a background check on the writer and found that the previous year he had written for Rolling Stone. Financial publications tend to write about investments that are in favor. Buying value is investing in quality when its out of favor.
10. Paying too much for investment services- It does not take a rocket scientist to know that the less you pay, the more you keep. Why should you pay a 5.75% upfront load on a fund when another fund with a similar track record charges you 1% or 0%? Why should you pay $100 for a stock transaction when you can pay $15.00? Keeping close tabs on what fees you are being charged can translate to a better return. Brokerages, banks, and insurance companies will not reveal the alternatives. I will.
