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You as Chief Investment Officer

By Bigg Success Staff
09-26-08

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There’s one thing you should know about your money – no one will watch over it better than you. So you must take control of your money and your investments.

Now you may be thinking, “I don’t understand money.”

Well, the cold, hard truth is that you better learn the basics because otherwise you will find people who take your money without giving you the returns you deserve.
 
You may be saying, “I don’t have time to manage my investments.”

There are ways to compensate for that, but you need to understand that being entirely “hands-off” increases your risk of undesirable net returns.

We dug up a great article from Money, written by Jason Zweig. It’s an interview with William Sharpe, the dean of financial markets. Sharpe is revered in academic financial circles, winning a Nobel Prize, for his revolutionary work on market principles.

Sharpe reduces all of his knowledge into 4 key principles of investing:

#1 – Diversify
Owning assets that represent the entire market gives you the best return given your risk.

#2 – Economize
Just as you would with any other outlay, look for the lowest cost way to manage your money and conduct transactions, without sacrificing quality.

#3 – Personalize
Tilt your portfolio toward your unique circumstances, thinking about risks you have outside financial assets.

#4 – Contextualize
Anytime you’re thinking of straying from just buying the market, think again. Make sure you can justify the reasons behind your action.

Putting it into practice

You can use these four key principles to guide you as you make investment decisions. Let’s look at a simple way to put them into practice:

  • Buy shares in a mutual fund that targets a specific retirement date.
  • Make it a no-load fund with low expenses.
  • Buy additional shares in mutual funds that target assets where you have significant exposure. For example, if you have a long commute, you can hedge by investing in stocks that will profit from high gas prices.
  • Don’t stray. When you’re thinking of buying a stock you just got a “hot tip” on, think again and ask yourself why you’re buying. Don’t sell just because the market falls. Stick with your plan.  

There are other ways to execute Sharpe’s principles. However, this is the simplest way to do it, especially if you don’t have much time to manage your investments or you don’t understand investing that well.

Just don’t forget – you are the Chief Investment Officer for your organization. Ultimately, you have to take responsibility for how well your portfolio performs. For most of us, it’s best to outsource and inspect – make sure your chosen managers are performing well. If not, find one that will. Your future depends on it!

Hear today’s lesson and laugh on The Bigg Success Show

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Why Your Brain May Not Be the Best Money Manager

Morningstar, one of the most respected names in financial information, recently held their annual investment conference.

There was a great deal of discussion about the volatility of the market and how jittery it’s making many investors. Jittery investors like to do something, but the problem is they don’t make the best decisions in troubling times.

 

We have met the enemy!

One of the speakers was Jason Zweig, who is also the author of Your Money and Your Brain. Our brains can be our own worst enemies when it comes to investing. He said there are two parts of our brain – the reflexive (emotional) part and the reflective (logical) part. The emotional side is ever-present; we have to consciously call upon the logical part.

Obviously, we want to buy low and sell high. The problem is, with the emotional part of our brains running rampant, we may tend to buy high and sell low!

So don’t get in a hurry to sell in times like these. Stay the course if your investment horizon is five or more years, because research shows that a broad portfolio of stocks tends to go up as long as you hold them for five years or more. If you need the money (e.g. you plan to retire or send a kid to college) within the next few years, talk to your investment advisor to determine your best move.

You can make money with a stock that goes nowhere!

Let’s say that you have $100 to invest each month. You decide to invest it in a broad index fund (e.g. the S&P 500).

NOW: Assume that shares of that fund are selling for $20 right now. So you buy 5 shares.

Month 1: Assume the price falls 50% to $10 per share. But you keep investing. You buy 10 more shares with your $100 monthly contribution. So you’ve invested $200 total and your 15 shares are worth $150. You’re in the red. But you don’t care – you’re in it for the long-term!

Month 2:
Assume shares of this fund are now selling for $20 again. With your $100 monthly investment, you buy 5 more shares bringing your total to 20 shares, worth $400. But you’ve only invested $300. You’re $100 ahead, even though the share price is the same as it was when you started!

Reacting logically may mean not reacting at all!

It’s very difficult (if not impossible) to predict what the stock market will do. However, research has shown time and again that staying the course is usually the most profitable path for most people.

It’s understandable that you might be worried right now with the market being so turbulent. But don’t panic – react logically … which may mean not reacting at all!

 

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