The Top 5 Things Every Investor Should Know

Worried about the wild swings in the stock market? Not sure what’s next for the economy?

You can successfully invest in these uncertain times—and you won’t have to chase the next new IPO or buy into the latest advice on CNBC.

Here are the top five things every investor should know.

1) Costs Matter.

Over a working career, an increase of 1% per year in expenses results in almost a 30% reduction in lifetime wealth accumulation.

2) Inflation Counts.

The average mutual fund investor has not even kept up with inflation over the past 20 years —even with the stock market and bond market generating solid returns.

If inflation is consistent with long-term averages, in ten years you will need $135 to purchase goods that cost $100 today.

3) Diversify Effectively.

Sure, diversification helps portfolios to weather big declines in any single asset class. However, effective diversification requires much more than just buying a few funds. Investments that sound “different” (like “international” vs.” domestic” stocks) may provide no diversification value when combined in a portfolio.

4) Market Timing Doesn’t Work.

The average mutual fund investor loses 2% per year due to chasing performance and related bad timing decisions.

In fact, most investors may be better off by simply buying index funds.

5) Don’t Believe the Hype.

Your odds of picking a fund manager who can consistently beat his benchmark are low and the advice can be expensive. The average actively managed mutual fund has an expense ratio of 1.4% while the average index fund has an expense ratio of 0.9%.

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4 thoughts on “The Top 5 Things Every Investor Should Know

  1. Pingback: Why Warren Buffett Was Right: “Diversification is Protection Against Ignorance” « Portfolio Investing Blog: Portfolioist

  2. Pingback: Answering David Swensen’s Call to Arms « Portfolio Investing Blog: Portfolioist

  3. Pingback: From the Portfolioist Book Shelf: Your Money Ratios by Charles Farrell | The Garden of Princess Aileen 心灵的驿站

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