Bill Tarlo's 10 Rules for Smart Investing

These rules for investing apply if you are a do-it-yourself (DIY) investor or if you use the services of a financial advisor.   Remember that there is a difference between investing and saving.  Investing is usually related to a longer term goal such as retirement whereas saving is typically for a shorter term goal such as a vacation.  The terms are often interchanged, but not necessarily synonymous.  The term “investing” is somewhat nebulous as it does not state how funds will be allocated and what investment vehicles may be used.  

Here are my 10 rules for smart investing:

1. Investing should be done as part of a financial plan with pre-defined goals.  Examples of these would be retirement, paying for children’s education and purchasing a first home where both the amount of money required and the time to acquire it can be reasonably estimated.

2.     Investing should take into account the investor’s risk tolerance.  All investments pose different degrees of risk, and the greater the risk the greater the potential reward and potential loss. 

3.     Never invest in anything you don’t understand or sounds too good to be true.  People who were burned by the Bernie Madoff Ponzi scheme did not follow this rule.

4.     Invest in low cost mutual funds and exchange traded funds (ETFs).  Expenses do matter and over a 25 or 30 year period can mean the difference between a secure retirement and one not so secure.

5.     Avoid investing in individual stocks unless you know the company well and are prepared to do research and follow the company regularly.  No one can know a company as well as insiders (e.g., management, board of directors and counsel).  If you only have a portfolio of individual stocks you are unlikely to have a diversified portfolio.

6.     Use the services of an independent fee-based financial advisor if you are not comfortable as a DIY.  Do not use someone who is selling proprietary products and receives a commission.  Use an independent fee-based professional.

7.     Do not chase return; past performance is no guarantee of future return.  It is more important to avoid huge losses when the market is tanking than to achieve the highest returns when the market is on a hot streak.  You should strive for a portfolio for all seasons.

8.     Invest for the long term and review your investments periodically (quarterly or not less than semi-annually).

9.     Do not ignore income taxes when making investment decisions.  The tax code is complex and small mistakes can cost thousands of dollars.

10.  Get a second opinion if you have any doubts about your financial advisor.   Warning signs are:  not returning phone calls promptly, pushing specific investment products, inconsistent advice, and poor performance over an extended period.

Following these rules will not guarantee financial success but they will increase the probability of reaching your financial goals.