Secrets of Winning Personal Investing

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My experience is that businesspeople often make one of the following three mistakes:

  • Being too busy. The business takes up so much time and energy that personal investing gets shunted aside. You'll get around to it tomorrow--but tomorrow never comes.
  • Being too daring. With little time to think through a prudent investment strategy, many busy businesspeople invest on hunches or on tips heard at the office.
  • Being too cautious. Some successful people are so afraid of losing their hard-earned wealth that they cheat themselves out of investment earnings by sticking to the safety of insured bank accounts and government securities, despite their miniscule returns.

The problem is that each of the mistakes above is potentially very damaging over time. The reasons:

  • If you're always too busy or preoccupied, you'll never get to first base with your investing.
  • If you only play for the big win, responding to every tip and rumor that comes along, you probably won't have any wins at all.
  • If you are overly cautious, seeking safety in bank accounts, you'll risk losing everything. The low return that bank accounts pay will be more than consumed by inflation and taxes. You'll end up with far less than you started with.

Shifting gears

Getting your personal finance into healthy shape isn't that difficult these days--thanks to the availability of mutual funds, investing in everything from the stock market to bonds to foreign currency.

By picking the right mix of mutual funds, you can match the return you want to get with the degree of risk you are willing to take. Mutual funds are managed by investment professionals.

Asset allocation, or having the right mix of stocks, bonds and cash in your portfolio is the greatest single determinant of investment success.

As a starting point, I suggest a mix of 75% stock funds and 25% bond funds for the average person.

If you're younger--say under 45--then you have longer time horizons and can take more risks with your money. In this case I would raise the stock portion and cut the bond portion of your portfolio to 90:10 or even 100% equities.

If you are older, increase the bond portion to maybe 35:65.

If your business or profession is cyclical and a bad season could put you in a financial bind, consider opting for conservative short-term bond funds. These funds produce returns that outrun inflation, and offer a considerable degree of safety as well.

If your personal income is more predictable, opt for stock funds that offer significant growth prospects.

Excerpt from: Bottom Line Yearbook based on Sheldon Jacobs, editor in chief and publisher of The No-Load Fund Investor.

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