Posts filed under “Investing”
Some smart, common sense advice from a Financial planning site: Principles to Assist in Financial Decisionmaking:
• Plan ahead. Give yourself time to realize your goals. Proact instead of reacting to events
• Life is full of tradeoffs.
Working is trading your time for groceries. In deciding how much money to
save, consider the real costs.
• Consider Opportunity costs.
The opportunity cost of doing something is highest-valued activity you
might have done instead.
• Think on the margin.
Decisions should ignore sunk costs and weigh the marginal costs and
benefits. If I take this action, will I be better or worse off than if
I do not take this action?
• Real returns matter.
Your real income, real
wealth, and real rate of return measure your purchasing power, adjusted
• The time value of money.
In evaluating cash
flows, we need to convert future dollars into a present value, which
can be compared to the current price of the cash flow.
• The power of compound interest.
Earning interest on interest turns seemingly modest saving into
remarkable wealth, an insight that Albert Einstein reportedly described
as “the greatest mathematical discovery of all time.”
• Leverage is a two-edged sword.
Debt is one way of creating leverage, in which a relatively small
investment reaps the benefits or losses from a much larger investment.
• Efficient markets.
Markets are "reasonably efficient" — but not perfectly so. Prices reflect informed opinions of many observers. If you think the price is
wrong, you should consider whether you know more than the market.
• The future is uncertain.
Do not overestimate your ability to predict the future. Place the most
weight on the future that is most probable, but do not ignore other
• Be resilient. Don’t despair when the unexpected
happens. Learn from your mistakes, but don’t be obsessed with the past,
which cannot be changed.
• Diversification reduces risk. Prudence is a
well-diversified portfolio of eggs in several, very different baskets.
• Risk can be rewarding.
In a risk-averse world, safe investments will have relatively high
prices and low anticipated returns; risky investments will have
relatively low prices and high anticipated returns.
• Think differently.
If the herd-like instincts of most investors sometimes push asset
prices to unreasonably high or low levels, then consider a contrarian
• Beware of people peddling products. Someone who gets a commission for
selling you something often has a conflict of interest.
• If it sounds too good to be true, it probably isn’t true.
get-rich-quick advice evidently believes he can make more money from
selling his advice than from following it.
Smith Financial Place