When I Googled the phrase “what is smart investing” I got back 381,000,000 results in less than a second. Wow. This seems to be a hot topic for many people. (Just for fun, I Googled “what is stupid investing” and received 17,200,000 results.) Let’s dig into this topic today.
First, what is “smart investing”? When I read what some of the 380 million searches show, I think there is confusion over outcomes vs. tactics. That is “smart investing” focuses on what you want to have happen and not how you get there. Here is how I define smart investing:
Smart investing allows you to achieve your financial goals with the greatest chance of success in the time frame you want with the lowest chance of failure and with as much turbulence as you can stand.
It’s like paddling a kayak down a river. You want to get from point A to point B in a certain amount of time and you don’t want to tip over or smash your kayak on the rocks. (It helps to keep your eyes open.)
If that’s what smart investing is, then what does it take to be a smart investor? Here are seven attributes/actions I think you need to be a “smart investor.”
- Know Yourself. Be clear about your goals, time horizon and how much investment market ups and downs you can tolerate with changing course. If it helps, write down your investing approach.
- Read a few goods books. Get educated to know what to do and what to avoid. I suggest you read at least three of these investing books:
- “If You Can” by William Bernstein
- “A Random Walk Down Wall Street” by Burton Malkiel
- “The Coffeehouse Investor’s Ground Rules” by Bill Schultheis
- “Little Book of Common Sense Investing” by John Bogle
- “The Investment Answer” by Dan Goldie and Gordon Murray
- Start early & save regularly. Too many people focus on market timing and time in the market is as (and maybe more) important. The power of compounding over time is often overlooked. However, Ben Franklin wrote, “Money makes money. And the money that makes money, makes money.” Albert Einstein understood the power of compound interest when he labeled it the eighth wonder of the world. Warren Buffett has stated that compound interest is one of his three keys to success. There is a very good article on the 10 reason compound interest is the eight wonder of the world at this LINK.
- Build an effective and diversified portfolio. Any of the books I mention above can help you build a smart portfolio (especially Bill Schultheis book), but here is a short summary:
- Hold a variety of different types of investments: large and small U.S. and non-U.S. stocks, bonds and real estate.
- Invest using a passive approach, that is, buy securities that own large number of stocks or bonds and don’t own securities that buy and sell in a futile effort to time the market.
- Choose low-cost mutual funds and Exchange Traded Funds (ETFs).
- Practice the three P’s. Smart investors are Patient, have Perspective and are Persistent. This approach avoids the behaviors that sink too many investors like herd following, fear of missing out, bright shiny object disease, short-term thinking, the hot hand fallacy, hindsight bias and mental accounting. In other words, the 3 P’s help to block out all the useless and distracting noise that surrounds the investing world.
- Ask for help when you’re stuck. After a lifetime of guiding individuals and couples to manage their personal finances, I admit I’m biased on this one. However, I believe none of us are as smart as all of us. This applies to being a smart investor. There are many good and free resources that might be able to help you. If you have a 401(K) or 403(b) plan at work, most of the companies that provide these plans offer free resources. You can also ask the company that holds your investments for help and all the major companies offer free on-line resources. However, be aware of the potential conflict of interest these companies have. Don’ be afraid to ask questions and never ever buy a product or service you don’t understand. If you want to hire a personal financial advisor, be sure to look for one that is fee-only and a fiduciary. Check out NAPFA and The Garrett Planning Network for advisors near you.
- Monitor and rebalance your portfolio regularly (but not too often). My mantra is “if it matters, measure it. “At least twice a year, review your goals, time horizon and portfolio to make sure nothing has changed. You also need to review your portfolio to make sure it’s well-diversified without one type of security becoming too much of your portfolio. (You can read my articles on the importance and benefits of diversification elsewhere on this blog.)
There you have it. Seven items you need to be a smart investor. Start with the first one – know yourself – and move through the list. If you do these seven things, you will be head and shoulders above the average investor.
If you find yourself at #6 (“Ask for help when you’re stuck”) and want to speak with a fee-only and fiduciary financial advisor who always puts your interests first, please click on the “make an appointment” button on this website. We’ll be happy to have a free Get Acquainted session with you to see if we can help you get un-stuck.