The Dailies

Part 1

Money Magazine collected the best advice from some of the smartest investors (and other people) who have ever lived.

1. Be humble

When you do not know a thing, to allow that you do not know it–this is knowledge.
–Confucius

Investing is a big bet on an unknowable future. The mark of wisdom is accepting just how unknowable it is. Granted, that’s not easy. Our brains are built to think the future will be like the near past. And we’re too ready to act on the predictions of pundits, who are no more clued in than we are about what lies ahead.

Being humble in the face of uncertainty keeps you from costly mistakes. You won’t jump on yesterday’s bandwagon. And before you invest, you’ll be more likely to ask a key question: “What if I’m wrong?”

2. Take calculated risks

He that is overcautious will accomplish little.
–Friedrich von Schiller

The returns you get are proportionate to the risk you take. This is a fundamental law of the markets. It’s why five-year CDs typically pay more than six-month ones and why you’re disappointed if your emerging markets fund does no better than its stodgy blue-chip stablemate. History unequivocally supports this “no free lunch” principle. Going back to 1926, stocks (high risk) have paid more than government bonds (medium risk), which in turn have beaten low-risk Treasury bills.

Among many, many other things, this law suggests:

* To earn returns high enough to build true wealth, you have to put some of your money in risky assets like stocks–the only investment to handily beat inflation over time.
* If a financial salesperson tries to tell you his product offers a high return with no risk, get that claim in writing. Then send it and his business card to the SEC.

3. Have an emergency fund

For age and want, save while you may; no morning sun lasts a whole day.
–Benjamin Franklin

The first step in constructing any serious financial plan is to create an emergency cash fund–ideally, three to six months’ living expenses–stashed in a low-cost ultrasafe bank account or money-market fund. Without this financial cushion, any unexpected expense can derail your long-term plans.

These days, happily, that emergency stash won’t just sit idle. Top bank accounts like the one at UFB Direct (888-580-0049) and perennially competitive money funds like Vanguard Prime (800-851-4999) now pay more than 5%.

This entry was posted on Wednesday, August 29th, 2007 at 2:19 pm and is filed under Infotainment. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.