1. Do you have a plan?
I’m not talking about a 30 page document with glossy pictures and lots of charts and graphs. I’m talking about a simple, easy-to-follow plan that contains basic stuff, like your goals, your resources, and your time frame. If you don’t have a plan you have very little chance of succeeding in the stock market.
A plan is a framework that keeps you focused on the things you need to do. It contains a list of your goals, and how you plan to accomplish them. It has your rules and checklists, and it helps you stay out of trouble when the market takes a dive. Studies have shown that having a written plan works. People who do ‘some planning,’ even just a little bit, do twice as well in the market as people who don’t do any planning. And those who so ‘serious planning,’ where they work with a mentor or a coach and write everything down – those people do 4 times as well as non-planners.
2. How well do you understand investing?
Very few investors can honestly say that they fully understand how stock and bond markets work. They’re unaware of the forces that actually determine their investing results. Having your wealth in something that you do not fully understand can be extremely dangerous to your wealth, especially when markets are prone to sudden free-falls from time to time. Never put your money into anything you do not fully understand. It is your coach’s job to help you focus on the right things, so that you don’t have to focus on everything.
3. Do you know what your risk profile is?
The biggest single cause of bad investing results is panic selling. Knowing your risk tolerance will help you avoid this mistake. What would you do if the stock market declined by 10%? What about 20%? Everyone has a pain threshold, and it’s important that you know what yours is before you get started.
Every investor has a risk profile, but measuring it is not easy. There are three parts to it: your willingness to take risk, your ability to take risk, and your need to take risk. People who have great wealth do not need to take risk. Their wealth affords them the opportunity to ‘lock in’ a perpetual income stream that’s bulletproof against inflation and taxes. The rest of us have to take some risk, but it makes no sense to take any more than necessary in order to achieve your objectives.
4. How well diversified are you?
You know you should be diversified, but are you? Do you know how to measure it? It’s often said that diversification is the closest thing there is to a free lunch, at least when it comes to investing. That’s because diversification reduces your overall level of risk, while at the same time adding to your likely overall level of returns. If that sounds too good to be true, don’t worry. The benefits of diversification is one area of market theory that every expert can agree on.
5. Do you know your Personal Track Record?
This is another one that most investors get wrong. Did you know that the average mutual fund investor only makes about 3.5% per year on his investments? You probably think that you do much better than that. After all, you’re pretty smart, and you have a good broker. But have you ever really taken the time to do a thorough accounting of your actual performance, including all of your investment accounts? Very few have.
What usually happens is, investors remember their good performing years, but forget their bad ones. Or they remember their big winning stock picks, but forget about the losers. This selective memory is part of human nature, but it’s not very helpful if you want to improve your results.
6. Do you have a firm handle on your investing costs?
Even if you own a “no load” mutual fund, there are hidden costs that you might not be aware of. Limiting your investment choices to no load funds is not the solution. Your coach can show you how hidden costs eat away at your money. If you think that your expenses are low just because you have your account at a discount broker, think again. The average retail investor pays an effective rate of about 2% of their account value per year in total costs. Think about that for a minute. If the average investor is only making 3.5%, and it costs 2% to play, what hope does he have to accumulate wealth?
7. Do you know what your current asset allocation is?
Simply put, this is the percentage of your money that you have in each of the major types of investments. A typical asset allocation strategy might be 70% in stocks, 25% in bonds, and 5% in cash. This is a fundamental concept of investing, and the vast majority of new investors don’t pay enough attention to it.
8. Are you aware of the conflicts of interest that exist in the financial services profession?
The financial industry pushes the idea that, by using their research, you can consistently and predictably make lots of money. They use the media to create the illusion that they can do something that is impossible. They want you to believe that they know ahead of time, what the stock market will do, which stocks will go up, and which ones will go down. By understanding how this fairy tale is marketed to the investing masses, you can avoid getting seduced by it.
9. Are you in control of your investments, or do you just do what you’re told?
A skilled, experienced, and competent coach can help you design, build, and manage a comprehensive investing strategy that will fit your unique financial circumstances. It will require some time and hard work up front, but once your plan is in place, keeping it current is relatively easy. Rebalancing your portfolio once per year is all it takes to stay on top of your investments. Writing a plan gives you control over the situation, instead of requiring you to react with fear or regret when the market does something unexpected. Your plan gives you control.