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September 13 - November 2, 2018
CORE PRINCIPLE 4: DIVERSIFICATION
1. Diversify Across Different Asset Classes.
2. Diversify Within Asset Classes.
3. Diversify Across Markets, Countries, and Currencies Around the World.
4. Diversify Across Time. You’re never going to know the right time to buy anything.
Ray emphasized that, by owning 15 uncorrelated investments, you can reduce your overall risk “by about 80%,” and “you’ll increase the return-to-risk ratio by a factor of five. So, your return is five times greater by reducing that risk.”
Because let me tell you: if you live in fear, you’ve lost the game before it even begins. How can you achieve anything if you’re too scared to take a risk?
“Risk comes from not knowing what you’re doing.”
In fact, while others live in terror of bear markets, you’ll discover in this chapter that they are the single greatest opportunity for building wealth in your lifetime.
A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread.
As I see it, 90% of surviving a bear market comes down to preparation.
“The four most expensive words in investing are ‘This time it’s different.’ ”
Over time the economy and the population grow, and workers become more productive. This rising economic tide makes businesses more profitable, which drives up stock prices.
In short, bad news is an investor’s best friend.
I suggest you commit that line to memory: “Over the long term, the stock market news will be good.” If you truly understand this, it will help you to be patient, unshakeable, and ultimately rich.
Asset Allocation Drives Returns.
So, deciding on the right balance of stocks, bonds, and alternatives is the most important investment decision you’ll ever make.
The moral: never bet your future on one country or one asset class.
Use Index Funds for the Core of Your Portfolio.
3. Always Have a Cushion.
4. The Rule of Seven.
The lesson: never underestimate the awesome power of disciplined saving combined with long-term compounding.
5. Explore.
Rebalance. I’m a big believer in “rebalancing,”
unsuccessful investors tend to “buy the thing that’s gone up and sell the thing that’s gone down.” One benefit of rebalancing, says Malkiel, is that it “makes you do the opposite,” forcing you to buy assets when they’re out of favor and undervalued. You’ll profit richly when they recover.
As you’ll discover, there’s only one real barrier to financial success: you! Once you know how to silence the enemy within, nothing can stop you.
In fact, this is part of a much broader pattern. In every area of life—whether it’s dating, marriage, parenting, the workplace, our health, our fitness, our finances, or anything else—we have a tendency to be our own worst enemy.
And what counts is not reality, but rather our beliefs about it.
This is why investors also need simple systems, rules, and procedures to protect us from ourselves.
Mistake 1: Seeking Confirmation of Your Beliefs Why the Best Investors Welcome Opinions That Contradict Their Own
The truth is, it’s never wise to fall in love with an investment.
The Solution: Ask Better Questions and Find Qualified People Who Disagree with You
The key is to actively seek out qualified opinions that differ from your own. Of course, you don’t want just anyone with a different opinion, but rather someone who has the skill, track record, and intelligence to give another educated perspective. All opinions are not created equal.
Mistake 2: Mistaking Recent Events for Ongoing Trends Why Most Investors Buy the Wrong Thing at Exactly the Wrong Moment
“Investors project out into the future what they have most recently been seeing. That is their unshakeable habit.”
3, today’s winners tend to be tomorrow’s losers.
“If you can’t add value, if you can’t create an asymmetry, then the best thing you can do is minimize your costs,” says Howard.
Mistake 4: Greed, Gambling, and the Quest for Home Runs It’s Tempting to Swing for the Fences, but Victory Goes to the Steady Survivors
The best way to win the game of investing is to achieve sustainable long-term returns. But it’s enormously tempting to swing for home runs, especially when you think other people are getting rich faster than you!
Remember, as Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.”
The Solution: It’s a Marathon, Not a Sprint
Mistake 5: Staying Home It’s a Big World out There—So How Come Most Investors Stay So Close to Home?
Mistake 6: Negativity and Loss Aversion Your Brain Wants You to Be Fearful in Times of Turmoil—Don’t Listen to It!
One reason why the best investors are so successful is that they override this natural tendency to be fearful during periods of market turmoil.
For example, these simple rules and procedures will make it easier for you to invest for the long term; to trade less; to lower your investment fees and transaction costs; to be more open to views that differ from your own; to reduce risk by diversifying globally; and to control the fears that could otherwise derail you during bear markets. Will you be perfect? No. But will you do better? You bet! And the difference this makes over a lifetime can amount to many millions of dollars!
Every day, think as you wake up, “Today I am fortunate to be alive, I have a precious human life, I am not going to waste it.” —THE DALAI LAMA
What you’ll find is that the path to achievement is followed by a fundamental three-step process.
The First Step to Achieving Anything You Want Is Focus. Remember: wherever your focus goes, your energy flows.
The Third Step to Achieving Whatever We Want Is Grace. Some people call it luck, some people call it God. Here’s what I can tell you, based on my own experience: the more you acknowledge grace in your life, the more you seem to have it!
But as important as achievement is, there’s a second skill that you’ll also need to master if you want to create an extraordinary life. This skill is what I call “the art of fulfillment.”