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Top 10 Rules for Money
Ten Simple Money Rules for Investing Success
Bad decisions and poor behavior are the primary reasons why many fail to meet their financial goals.
Bloomberg, July 5, 2021
To hear an audio spoken word version of this post, click here.
Creating lists1 is a useful way to organize your thoughts: I have created lists of rules for Investing, Valuation, Stock tips, Goldbuggery, even useless financial phrases to avoid. I find these exercises to be valuable ways to figure out what I think.
Thinking about money – saving it, spending it, and most of all, how to invest it – is something I have spent decades doing. This has led to recognizing several fundamental truths about capital.
Naturally, I have organized these rules into a list:
My Top 10 Rules for Money1. Investing Is Both Simple and Hard: The basic premise behind successful investing is easily understood: “Invest for the long term, be diversified, watch your costs, and let compounding work its magic.”
But following through can be challenging. Humans are plagued by an inability to just “sit there and do nothing.” Failing to do nothing leads to costly errors and loss of capital that erode returns. Understanding what is required is very different than being able to perform, regardless of circumstances, for decades on end.
This leads us to:
2. Behavior Is Everything: The inability to manage emotions and behavior is the financial undoing of many. To paraphrase William Bernstein, “the extent you succeed in finance is based on your ability to suppress your limbic system. If you can’t do that, you’re going to die poor.”
Even the greatest stock pickers will underperform if unable to control their emotional impulses. Allowing those emotional hot buttons to get pressed is how people go wrong in investing. There are no shortcuts, secrets or get rich quick schemes that work, except for my 3-day workshop where I reveal the secrets of the ultra-rich for the low, low price of $4,995. Sign up here.
3. Moderation In All Things: Think of the majority of the assets in your portfolio -– hopefully a diversified, global mix of passive index funds — as the basic meat and potatoes of investing. You can add seasonings, herbs, and vegetables to spice it up and add some flavor.
Want to do some early-stage investing in tech start-ups? Maybe some real estate speculation? Perhaps a few private equity investments in non-public businesses? Maybe even a fun trading account?
I don’t have a problem with any of that as long as it meets two conditions. First, you should understand that the odds of success are against you. Many billions of dollars are aggressively competing in the same space for returns. The professionals are always searching for an edge, and even with one, there are no guarantees of success.
Second, it should be a smallish chunk of your liquid net worth, perhaps about 5% to 10%. That is enough to provide you a little fun and intellectual stimulation. Some might even discover a knack for such investing. But the amounts should be small enough that if the investment doesn’t work out it won’t affect your financial plan.
4. Risk and Reward Are Inseparable: Risk is best defined as the probability of your returns differing from your expected outcomes.2 The problem is that many investors want better-than-market returns while assuming minimal risk. But returns are a function of the risks assumed.
Risk-free U.S. Treasuries yield almost nothing. To do better, own equities. But that adds volatility to your portfolio. If you seek higher returns, you can add low beta stocks that have the potential to do better – or worse – than the market as a whole.
5. Spend Less Than You Earn: Budgeting is simple: Income goes on this side of your household balance sheet, expenditures on that side and make sure the latter is lower than the former. It’s that easy!
I have zero tolerance for the spending scolds who tell you never buy a boat, don’t get a new car (especially a sports car), and avoid buying lattes. This is lazy, ignorant and poor advice given by charlatans and frauds who do not understand math or finance. If they did, they would add the magic phrase: “…if you cannot afford it.”
But if you can, then spend your money however you like but preferably thoughtfully. People often skip purchases they can afford out of misplaced guilt.3
6. Leverage Kills: Using borrowed money for nearly anything is the negative manifestation of the three prior rules. Yes, get a mortgage to buy a house you can afford. But never use borrowed money to buy speculative assets that are subject to further capital calls.4
7. Understand Your Role: The markets are populated by all kinds. There are traders and investors, hedgers and speculators, and everyone has different risk tolerances, time horizons and financial goals. Do not assume what any of America’s 800 billionaires have to say about investing is especially relevant for your needs. Their goals are likely different than yours.
8. Be Aware of Your Limitations: What gets so many investors into trouble “is not what we don’t know, it’s what we know for sure that just ain’t so.”5 Understanding the limitations of your cognitive errors and belief systems is just the start. It’s also important to know what inadequacies you have financially, emotionally and behaviorally. Operating outside of your own capabilities is a good way to run into trouble.6
9. Own It: You are responsible for own financial well-being, not the Federal Reserve, the government or whichever huckster is yelling the loudest on TV at the moment. You alone accept responsibility for your investments and spending. The sooner you take ownership of your financial circumstances, the better off you will be.
10. Invest In Yourself: This is the most important investment you can make. Educate yourself, develop an expertise and add to your professional skill stack.7
And invest in your future by making sure you fully fund your retirement accounts every year. Make those long-term investment needs before spending on short term wants (that’s as much of a scold as I can muster).
After making my list, I asked Twitter folks for their favorites. The result was hundreds of suggestions. Consider them an ala carte menu showing both breadth and depth.
My final admonition is the most important rule: “Behave!” As noted throughout, ill-advised decision-making and poor behavior are the biggest reasons why many fail to meet their financial goals. All of the above either directly or indirectly refers to behavioral issues dressed up in the lexicon of finance.
Go make a list of rules, then follow it. Your future self will thank you.
Previously:
Your Favorite Money Rules (July 2, 2021)
Ritholtz’s Rules of Investing (part I) (October 6, 2012)
Ritholtz’s rules of investing (part II) (October 20, 2012)
_______
1. Lists are a useful way to organize your thoughts: The Top 10 list was the heart of David Letterman’s late night career; the listicle has been a big driver of social media and online content creation. As a heuristic, the list is a useful mental shortcut (although that does come with some baggage).
2. Note this is different than “Uncertainty.”
3. In my office, I have seen vacation homes, sailboats, and the occasional Ferrari purchased only after many assurances that “Yes, you can afford that” (you can afford 100 of them, but let’s start with 1).
4. Archegos Capital Management was running about 5 to 1 leverage, then blew up quite spectacularly, losing $20 billion and wiping out founder Bill Hwang. Lehman Brothers, founded in 1847, regularly ran 20 to 40-to-1. They shuffled off this mortal coil in 2008 during the financial crisis, an act more akin to suicide than murder. The most extreme example was Long Term Capital Management, which ran 100-to-1 leverage. When they blew up they nearly took the banking system with them.
5. For example, that above quote, often ascribed to Mark Twain, is more likely unknown.
6. The lesson taught in high-performance driving schools is the importance of operating within the capabilities of both the vehicle and the driver.
7. Take care of your physical body (eating healthy, exercising, getting enough sleep), and your emotional state (meditating, relaxing).
~~~
I originally published this at Bloomberg, July 5, 2021. All of my Bloomberg columns can be found here and here.
The post Top 10 Rules for Money appeared first on The Big Picture.
El dólar se aprovecha del sentimiento de aversión al riesgo de los mercados antes de la publicación de las actas de la reunión del FOMC
La libra se vio atrapada ayer en el rebote del dólar, revirtiendo sus ganancias anteriores frente al dólar para cerrar la sesión un 0,34% por debajo. El par GBPUSD cotizó ayer cerca de su nivel más bajo en dos meses, pese a repuntar al principio sobre la base del optimismo por las reaperturas y el entorno general de búsqueda de riesgo de los mercados financieros. La atención seguirá centrándose hoy en el dólar estadounidense puesto que no contamos prácticamente con noticias macroeconómicas para la libra. De momento, los mercados retoman poco a poco los avances tras el movimiento provocado ayer por el dólar, lo que está ayudando a la libra esterlina a repuntar la décima parte de un punto porcentual frente al dólar.
La sesión de ayer vio como el sentimiento con respecto al riesgo dio un giro de 180° tras conocer unos datos de EE. UU. más flojos de lo esperado e iniciarse el cambio de posiciones abandonando los activos más arriesgados, como los valores bursátiles, por bonos del tesoro estadounidense. Pese a que tanto el dato del PMI compuesto como el del sector servicios fueron más flojos de lo esperado, fue el índice del sector servicios de ISM de junio, que cayó de 64,0 a 60,1, el que llevó la agitación a la sesión vespertina en Europa. La preocupación sobre el crecimiento económico en Estados Unidos tras la publicación del índice de ISM impulsó al alza al dólar al convertirse el mercado en general a la aversión por el riesgo, lo que a su vez afectó a la demanda de materias primas, llevando a los mercados del petróleo a revertir las ganancias obtenidas al principio de la jornada. Desde entonces el dólar cuenta con una fuerte demanda y la rentabilidad del bono a 10 años se mantiene en los niveles más bajos alcanzados ayer, mientras que el 2 años se ha movido solo ligeramente al alza. Los mercados esperan ahora las actas de la reunión de la Reserva Federal que se publicarán esta noche y que serán recibidas con mucha más atención de lo habitual tras el cambio de tono hacia la línea dura que tuvo la Fed en su reunión de junio y la respuesta de los mercados a la gráfica de puntos del mes pasado. La gráfica de puntos, que refleja las expectativas sobre los tipos de interés de cada uno de los miembros de la Fed, apuntó a dos subidas de tipos en 2023. Desde entonces los miembros de la Fed no han podido transmitir un consenso claro sobre su opinión sobre las políticas monetarias, lo que quiere decir que los mercados buscarán, en las actas de la reunión que saldrán esta noche, nuevas pistas sobre los plazos para el inicio de la subida de tipos o sobre señales con respecto a la reducción del programa de expansión cuantitativa. Aparte de eso, los inversores se fijarán, en los datos de nuevas ofertas de empleo en mayo de JOLTS.
El doble impacto de un dólar estadounidense más fuerte y unos precios del petróleo más bajos de ayer afectó considerablemente al dólar canadiense. Al caer 0,99% frente al dólar, las pérdidas de ayer del loonie fueron sus mayores pérdidas desde el 26 de febrero. El par USDCAD se mantiene ahora en los elevados niveles que vimos tras el impacto de la decisión de la Reserva Federal, con una diferencia de casi un 3,5% con respecto a los últimos máximos del CAD. Al contar hoy únicamente con la publicación del PMI de junio de Ivey, los operadores en dólar canadiense continuarán siguiendo la evolución del dólar ponderado además de las dinámicas del mercado del petróleo. El WTI vuelve a cotizar a 74 $ por barril tras la pequeña aventura que le llevó ayer hasta casi los 77 $. Es probable que pronto tengamos un acuerdo a corto plazo de la OPEP+ tras las conversaciones mantenidas por altos funcionarios estadounidenses y miembros de la OPEP+ para tratar de mantener el precio de la gasolina en niveles bajos, mientras que probablemente se posponga para más adelante el conflictivo asunto de la producción de 2022. Las noticias sobre un incremento de la producción a finales de año deberían aportar cierta estabilidad a los mercados del petróleo.
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Need Help! Amada LC1212 Alpha II (1995 model)
Anyone here using a Amada LC1212 Alpha II still? I am working for a company that have one of this unit, in pieces ATM. We want to get it up and running. I am after any manuals and software, if anyone here wants to share. Any advice on how to run it will be most welcomed.
Thank you.
Learner2
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