Three Golden Rules Of Investing

You need not look too hard to find someone championing low-cost mutual funds. There are countless articles discussing their virtues, and you may be tempted to believe that low cost translates into great funds and successful investing.

As a professional adviser, I can state with confidence that the success (or failure) of an investment plan is never the result of finding (or not finding) the lowest-cost mutual funds. This does not mean that cost should not be given any consideration, but the expenses of most funds or whether they are “no load” funds are not the most important factors that affect the outcome of an investment plan.

Mutual funds and investments are nothing more than tools meant to achieve investors’ goals. Unfortunately, far too much reporting is done on the tools themselves and how much they cost. Far too little is reported on how these tools should be arranged and used to achieve investors’ goals.

Investing does not have to be complicated. Success in investing may be more easily achieved if investors understand and adhere to the three “golden rules.” Following them offers an excellent chance for success with your investment plan. The first two rules are absolutely essential.

Rule 1: Proper Asset Allocation

The first rule is proper asset allocation. This refers to having investments divided over different asset classes, such as stocks, bonds, cash, real estate and maybe alternative investments. You should also diversify within allocations. For example, within stocks, you should include foreign and domestic large-, mid- and small-caps in both growth- and value-style investments. (Very often, investors allocate disproportionately large percentages of their portfolios to large-caps, since very large companies may be more stable than smaller companies.)

Further, all of the above positions should be in either professionally managed funds or index funds or some combination of both. In this article, unless specifically stated, any reference to stocks means index funds or professionally managed stock funds and does not mean individual stocks selected by the investor.

Most people’s investment portfolios are meant to last for long periods of time, and a well-allocated portfolio of stock mutual funds has almost always delivered more wealth (money, total return, call it what you will) than bonds. Is it any wonder, then, that the chance of increasing your wealth over the long term generally grows with the percentage of stocks in your portfolio?

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