The Investing Checklist….
Here’s a great investment checklist from Bob Seawright at Above the Market. Thanks for the great insights Bob!
- Understand the “arithmetic of loss” (a 10% loss followed by a 10% gain does not get you back to even).
- Correlation is not causation; consensus is not truth; and what is conventional is rarely wisdom.
- High fees are a major drag on returns; tax advantages and consequences matter a lot too.
- All other things being equal, ETFs are better than mutual funds.
- Complex instruments, reaching for yield and illiquidity are usually more dangerous than they appear.
- Asset allocation is more important than the product selection of a portfolio’s component parts.
- Since passive management beats active management most of the time, it is the appropriate default.
- Be clear about and cognizant of what Barry Ritholtz calls the “long cycle” – secular and cyclical markets.
- Our psychological make-up and the behavioral biases and cognitive impairments caused thereby conspire against our investment success and even when we recognize these problems generally, we typically miss them in ourselves (“We have met the enemy and he is us” – Pogo).
- Forgetting that nobody is close to objective and that nearly everyone wants a piece of the action will cost you a lot of money.
- An otherwise great investment plan can readily become a disaster is it doesn’t line up with our understanding, goals, objectives and risk tolerances.
- Risk is a complex and multi-faceted thing – it’s much more than just volatility.
- Manage risks before managing returns.
- Never lose sight of the facts that investing is both probabilistic and mean-reverting.
- Saving, trading and investing are very different things.
- We always know less than we think we know; thus forecasts are rarely even close to accurate.
- When making a trading decision, measure twice, cut once.
- It’s very dangerous to fight the Fed and/or the government.
- When reading financial or investment papers, the best stuff is usually in the footnotes.
- When you have reached your goal, stop playing.
- “For the simplicity on this side of complexity, I wouldn’t give you a fig. But for the simplicity on the other side of complexity, for that I would give you anything I have” (Oliver Wendell Holmes, Sr.).
- Data should always trump opinion and ideology.
- It is little consolation to lose less money than others or less than one’s benchmark.
- History doesn’t repeat, but it does rhyme.
- Save as much as you can as early as you can.
- Always have a contingency plan.
- Create and implement a written investment policy statement; review it often but alter it rarely and only for very good, data-driven reasons or due to a change in personal circumstances and after very careful consideration.
- When the cost of a negative outcome is greater than you can bear, don’t do it (or get out), no matter how great the odds of success appear.
- “This time is different” Is almost never true, especially in investing.
- Re-balance regularly.
Cullen Roche
Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.
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13 Comments
Great stuff!
Thanks Cullen!
Don’t thank me. Thank Bob Seawright.
But you are the intermediary. Great value added like the stuff the guy at abnormal returns posts.
Exactly. Time is our most precious resource, so aggregating it here is a great value.
This list is getting tailored slightly, then printed and stuck in a vinyl page sleeve for regular review.
Hi Cullen, may I suggest that in your revamped website you include these great investment insights into an “Investment Wisdom” section? I think it would make a great addition to the already great contents of your site.
Best,
Martin
Good idea.
I don’t get what the difference is between “investing” and “trading” is. People who call themselves investors seem to think that “trader” is a derogatory term. My stance is this: If my money doesn’t show up on the company balance sheet I’m not an investor, regardless of my methodology or time frame.
I would add another thing: Don’t try to emulate people who are operating in other Spheres (like the Market Wizards or Warren Buffet or something like that). Try to Find a mentor with a method that could work for you, adapt and improve it.
I have been on the deflationary camp/the hyperinflationists are truly missing the boat for a long time. This thinking seems to be the current consensus. The biggest smart contrarian idea I am maturing these days is that all the monetary easing will, in the not too distant future (i.e., within the next three eyars), bring inflation that central banks will fail to control and may turn into runaway inflation. This wouldnt happen overnight. There would be time to act but the right positioning goes beyond having a little gold as a hedge which is all I have right now.
A fine complement of the “sacred” Farrel’s 10 rules.
I prefer Bob Farrell’s 10 rules. This story about passive investments beating active investments is an old one. I am not sure how one can manage risk without making tactical changes to a portfolio. Maybe it is a matter of semantics … “Active management of a portfolio composed of passive assets?”.
Note that just buying a passive index “for the long term” is a pure bet on that asset’s volatility … unless of course one picks the entry point correctly, which is an active decision.
“Don’t fight the FED” ? The FED can only increase/decrease the money supply, set reserve requirements and that’s about it. And it doesn’t set interest rates, Mr. Market does.
No print button?
Could someone explain No 6? I understand “asset allocation” but what is “product selection” exactly?