This week’s learning is part 3 of a 5 part series on Personal Finance and Investing inspired by 3 books – The Investors Manifesto by William J Bernstein, I Will Teach You to Be Rich by Ramit Sethi, and The Millionaire Teacher by Andrew Hallam. (Parts 1, 2)
After last week’s cautionary note on viewing houses as investments, we move on to investment “don’t dos”..
1. Avoid actively managed funds.
– Actively managed funds take a hefty portion of your returns in fees and claim to be able to time the market.
– At this point, repeat to yourself – NO ONE KNOWS THE FUTURE.
– At every point of time, you will have funds who will beat the market. But, past returns are not a guarantee of future returns and long term returns of actively managed mutual funds make for dismal reading.
– Bill Bernstein pro tip: Treat every mutual fund adviser as you would a con man and you will do just fine.
2. Avoid stocks and gold.
– Popular stocks aren’t the ones that make money. Remember that every time you trade a stock, you are competing against finance professionals who do this for a living.
– While individual stocks can give you high returns, remember that high returns can only be achieved with high risk.
– You are your worst enemy. You cannot time the market. Don’t try. And don’t look for patterns in the financial markets. There are none.
– While Gold captures the imagination of the media, gold’s return over the past century has been poor.
– A pre condition to being a successful investor is a firm grasp of financial history – even the experts at Long Term Capital Management neglected history.. at their peril.
Bill Bernstein pro tip: Remember Pascal’s Wager and it’s implication on investing – the goal of investing is not to get rich but to avoid dying poor.
Sketch by EB
Related book recommendations –
– On Investment Theory – a random walk down Wall Street (how stocks, bonds, portfolios behave)
– On Financial History – Devil take the hindmost by Edward chancellor (on bubbles and panics)
So, what about the “do’s?” Coming up next week.
A Learning a Day 