Send comments and questions to Robert Stepleman, Business News, Herald-Tribune, 1741 Main St.At getAbstract, we summarize books* that help people understand the world and make it better. This means that, at least under current law, investors need to hold the proper assets in their taxable and tax-deferred accounts.įor example, taxable bonds should be in a tax-deferred account and "qualified" dividend stocks in a taxable account. Investors who ignore taxes will likely see lower after-tax portfolio returns. For many investors, this analysis would imply the return is not worth the risk.Įffective investors also habitually factor their tax situation into their investment strategy. Additionally, if interest rates rise, then not holding these to maturity will result in an actual loss of principal. The market is forecasting that inflation over the next 10 years will average an annualized 2.5 percent. Treasury securities were recently paying about 1.7 percent. This is one reason that many investors would be better served by low-cost passive-index mutual funds rather than higher-cost actively managed mutual funds.Įffective investors know risk and return are closely linked and that it's critical to make sure any investment has a return that fully compensates for the risk.įor example, 10-year U.S. One that has costs of only 1 percent will grow to about $179,085, a difference of $16,194. If an investment they select goes down 50 percent, then to fully recover it has to go up not 50 percent but 100 percent.Įffective investors also know that minimizing costs is critical to long-term investing success, especially in a low-return environment.įor example, if over the next decade the market returns an annualized 7 percent gross return, then an equity portfolio of $100,000 that has costs of 2 percent will grow to about $162,889. Doing that usually results in poor results because, by the time a typical investor hears about such a stock, its price has already spiked and any easy money has been made.Įffective investors considering an investment ask first, "How much money can I lose?" not "How much money can I make?" Investors should also keep in mind that even professional investors haven't been able to successfully market time consistently.Įffective investors think for themselves and don't make a habit of "following the crowd." This means that investors don't "hop on the bandwagon" by buying the latest popular stock. ![]() For example, in 2011 they report market timing equity investors lost 5.73 percent, while just holding the S&P 500 yielded a 2.11 percent gain. One study suggests that as much as 92 percent of an investor's return can be explained by this one decision.Įffective investors avoid market timing that is, jumping in and out of the market, trying to predict the market's shorter-term direction.ĭalbar research shows the futility of this tactic. Studies show that this decision is the dominant factor that determines an investor's returns. One of the most important habits of effective investors is to decide on their asset allocation - the division of their investment capital between equities, bonds and cash - before they make any investments. According to the research firm Dalbar, over the last 20 years, the crowd generated a return of 3.49 percent, while the S&P 500 generated a return of 7.81 percent. This pays off as the crowd significantly underperforms the market. ![]() It requires a way of looking at investing that is superior to that of the "crowd." To be effective, they need to look at the fundamental concepts of investing in a way that may be quite different than their current way of thinking.Īny investor can have a good year or two, in line with the saying, "even a stopped clock is right twice a day." But being a consistently successful investor requires more than luck. ![]() In other words, people have to be prepared to change the way they look at things. One of the main theses of the book is that to be effective requires a change in mindset. Its title is, "The Seven Habits of Highly Effective People." Back in 1989, one of the most popular business and self-help books of all time was published.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |