Friday, June 26, 2009

Investing is no game

By Dan Danford

I can understand the allure of chess. It’s pure intellectual challenge; just you and an opponent, focused on making the right moves and winning the ultimate battle. Every move by your opponent creates a new challenge. You adjust or you lose.

Investing offers similar challenges. Every day important variables change. The economy. World tensions. The management of companies you own. Competition. Technology. Everything changes.

So it’s not too surprising that so many people enjoy the challenge of investing. Like chess, it’s a game. It’s a game that tests your intellect, your instincts, your ability to think and act quickly.

But it’s not really a game. Results matter. Will your children go to college? Your grandchildren? Will you retire in comfort? Will you outlive your savings? Will there be anything left to pass along to chosen family members or charity? Truthfully, investing is a very serious business.

And you need to treat it that way to succeed. Although it’s nearly impossible to beat the market on a consistent basis, there are time-proven ways to invest for success. Follow these, and you’ll likely achieve your financial objectives. Ignore them at your peril.

Learn the rules. Ric Edelman wrote a bestseller called The New Rules of Money (1998, HarperCollins) and I recommend it highly. Most investment basics can be gathered rather quickly. Be wary of materials created by the marketing department of some investment firm; they were designed to sell, not to educate (the same for sponsored seminars). To learn, visit a library or take a college personal finance class.

Know your tools. Stocks, bonds, and mutual funds are basic building blocks, although there are thousands of variations of each. You can’t make good decisions if you don’t understand the options. You can’t understand the options until you spend time learning them. Believe me, you don’t really know today’s tools if the last time you looked was during the Reagan Administration.

Monitor the surroundings. Investing isn’t done in isolation. It’s not enough to read Money magazine or glance through The Wall Street Journal. You have to follow national and international news, too. You’ll need a smattering of economics, political science, and sociology.

You’ll also need a lot of humility. Truthfully, the future is difficult to predict and that makes investing problematic, though not impossible. Even professionals face frequent failure. Today’s talking head on CNBC is destined for obscurity tomorrow.

Be realistic about your ability. Behavioral scientists tell us that over-confidence is a major problem for investors. Test after test shows that people think they are better than they actually are. This same faulty belief leads investors to trade too much, guess wildly about the future, and see trends where none exist.

When it comes to ability, many of us choose the wrong game entirely. Our chief talent lies in earning money, not investing it. Energy devoted to career enhancement or more education often brings substantially more success than investment activity. Put energy where potential results are greatest.

Seek quality help. Investing is complex. There are thousands of options and important variables change every single day. On top of that, most of us have a huge emotional response regarding money. Almost everyone could benefit from a trusted, knowledgeable advisor.

Adjust. Family and goals change over time. So does the world of investing. It’s amazing the number of people still using investment ideas taught by a trusted teacher or friend three or more decades ago. What did Grandpa teach you about 401(k) plans, index mutual funds, or Internet trading? It’s probably time to make some helpful adjustments.

Focus on your goals. This may be the hardest part of investing today. Our world is full of noise. Twenty-four hour market news. Dozens of talking heads offering “helpful” advice. It’s all very distracting and it’s all very unnecessary.

Market noise is a short-term distraction, while investment success is a long-term process. Identify goals. Seek strategies and products likely to meet them. Make adjustments when something dramatic changes or if something better comes along. Seek quality professional help along the way.

Investing is not a game. But you can come out feeling like you’ve won if you follow the rules.

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