- Tax Planning
- Investments 1: Before you Invest
- Introduction
- Know the Steps You Should Take Before You Invest
- Recognize the Ten Principles of Successful Investing
- Principle 1: Know Yourself
- Principle 2: Understand Risk
- Principle 3: Stay Diversified
- Principle 4: Invest Low-Cost and Tax-Efficiently
- Principle 5: Invest for the Long Run
- Principle 6: Use Caution if You Are Investing in Individual Assets
- Principle 7: Monitor Portfolio Performance Against Benchmarks
- Principle 8: Do Not Waste Too Much Time and Energy Trying to Beat the Market
- Principle 9: Invest Only with High-Quality, Licensed, Reputable People and Institutions
- Principle 10: Develop a Good Investment Plan and Follow It Closely
- Understand the Risks and Benefits of the Major Asset Classes
- Understand the Risk and Return History of the Major Asset Classes
- Summary
- Assignments
- Investments 2: Your Investment Plan
- Investments 3: Securities Market Basics
- Investments 4: Bond Basics
- Investments 5: Stock Basics
- Investments 6: Mutual Fund Basics
- Investments 7: Building Your Portfolio
- Investments 8: Picking Financial Assets
- Investments 9: Portfolio Rebalancing and Reporting
- Retirement 1: Basics
- Retirement 2: Social Security
- Retirement 3: Employer Qualified Plans
- Retirement 4: Individual and Small Business Plans
- Estate Planning Basics
Principle 1: Know Yourself
Investing is not an end in itself; rather, it is a means of reaching your personal and family goals. Consequently, you need to know yourself well as an investor. Before you begin investing, you need to know your goals. You should have well-written and well-thought-out goals. Goals are critical to knowing yourself because they will help you understand what you are trying to accomplish with your investment program. For help on writing your goals, see the section on Setting Personal Goals.
As part of knowing yourself, you need to know your budget. You cannot invest without funds, and you should not invest with borrowed money. A critical part of successful investing is having a well-planned budget; a percentage of your income should be automatically earmarked for savings and investment in this budget. For help on budgeting, see the section on Budgeting.
You also need to understand your ability to tolerate risk because this ability will determine what kind of an investor you are. You want to develop a “sleep well” portfolio—a portfolio that is planned so that even when investments go wrong, as they often do, you can still sleep well at night.
You must watch for overconfidence in your portfolio. One possible sign of overconfidence is frequent trading. Research has shown that often men are more susceptible to overconfidence than women. A recent study found that men trade 45 percent more often than women trade and that men’s annual returns were, on average, 2.7 percent less than women’s annual returns. The study also found that single men trade 60 percent more often than single women trade and that single men’s annual returns were 1.4 percent less than single women’s annual returns (Carla Fried, “The Problem with your Investment Approach,” Business 2.0, November 2003, 146).
You must be wary of having overconfidence when trading online (via the computer) as well. The same study showed that the same group of investors beat the market by 1.9 percent before online or internet-based trading became popular. However, when the same group of investors switched to online trading, the group underperformed by 3.6 percent (Carla Freed, “The Problem With Your Investment Approach,” Business 2.0, Nov. 2003, 146). While online trading may appear to give you more control, it can result in lower overall returns if it leads to more frequent, overconfident trading.
