Your Money_ The Missing Manual - J. D. Roth [132]
Morningstar's mutual-fund selector (http://tinyurl.com/MS-selector) is an online tool that lets you sort funds by a variety of criteria, including expense ratio (Mutual Funds). For more on this subject, check out this article on predicting mutual fund performance: http://tinyurl.com/RA-mfund.
Keep It Simple
In How a Second Grader Beats Wall Street (Wiley, 2009), Allan Roth (no relation to your humble author) writes, "If you can't explain your investment strategy and every product in your portfolio to a second grader, you are probably doing something wrong."
People tend to think that the more complicated something is, the better it must be, especially when it comes to finances. But that just isn't the case. In fact, the opposite is often true—complex products caused the recent financial meltdown, after all.
So if you don't understand what your broker—the person who sells you stocks and bonds—is trying to sell you, don't buy it. Don't worry about feeling dumb or looking stupid. Remember that nobody cares more about your money than you do; it's your job to protect your savings from people with clever-sounding get-rich-quick schemes. The bottom line: Never invest in something you don't understand.
Don't Follow the Herd
People tend to pour money into stocks in the middle of bull markets—after the stocks have been rising for some time. Speculators pile on, afraid to miss out. Then they panic and bail out after the stock market has started to drop. By buying high and selling low, they lose a good chunk of change.
It's better to buck the trend. Follow the advice of Warren Buffett (http://tinyurl.com/WB-greedy), the world's greatest investor: "Be fearful when others are greedy, and be greedy when others are fearful."
In his 1997 letter to Berkshire Hathaway shareholders (http://tinyurl.com/BH-1997), Buffett—the company's chairman and CEO—made a brilliant analogy: "If you plan to eat hamburgers throughout your life and are not a cattle producer, should you wish for higher or lower prices for beef?" You want lower prices, of course: If you're going to eat lots of burgers over the next 30 years, you want to buy them cheap.
Buffett completes his analogy by asking, "If you expect to be a net saver during the next 5 years, should you hope for a higher or lower stock market during that period?" You want lower prices, of course: If you'll be investing for the next decade or two, you want to buy your stocks cheap!
Even though they're decades away from retirement, most investors get excited when stock prices rise (and panic when they fall). Buffett points out that this is the equivalent of rejoicing because they're paying more for hamburgers, which doesn't make any sense: "Only those who will [sell] in the near future should be happy at seeing stocks rise." Basically, he's trying to encourage you to follow the age-old wisdom to buy low and sell high.
Following this advice can be tough. For one thing, it goes against your gut. When stocks have fallen, the last thing you want to do is buy more. Besides, how do you know the market is near its peak or its bottom? The truth is you don't. The best solution is to make regular, planned investments—no matter whether the market is high or low. (For more on systematic investing, see All-in-one funds.)
Tip
Never act on a hot stock tip—they're almost always worse than worthless. It doesn't matter if the tip comes from your broker, your brother, or your best friend; in the words of Benjamin Graham, "Much bad advice is given free."
Ignore the Financial News
Financial news can be dangerous to the health of your investment portfolio. TV and magazines are filled with hysterical hype: "Dow tumbles 400 points!" "Eight stocks to buy now!" "Pork belly prices have been dropping all morning!" But how important is up-to-date financial news to the average investor? Do