Amid Losses, 12 Financial Truths Persist

June 18, 2006

Get a grip.

Spend a few days following the markets, researching investments and watching business television, and you are likely to find yourself overwhelmed by the uncertainty of it all. Will stocks rise or fall? Which mutual funds will shine? What's next for interest rates?

But take a step back and you will discover that there is, in fact, a surprising amount of certainty. True, you will never know which way stocks are headed in the days and weeks ahead. But when it comes to managing money, there are some undeniable truths -- including the dozen listed below.

1. It's hard to cut back.
As your salary has climbed, your standard of living likely also has risen. You probably eat out more and purchase pricier cars, and you might have traded up to a bigger home.

Within reason, there's nothing wrong with this. Constantly deferring gratification isn't a great strategy for getting the most out of life. Still, there is a price to be paid for this ever-rising standard of living. As your lifestyle grows more costly, it becomes more difficult to retire, because you need a bigger nest egg to sustain your standard of living. Sure, to make retirement affordable, you could slash your expenses. But once you get used to a certain standard of living, it's extraordinarily difficult to cut back.

2. You'll never be satisfied.
Instead of cutting back, most people constantly strive to raise their standard of living. They are forever aiming for the better car, the bigger house or the larger paycheck, only to become quickly dissatisfied once they get what they want.

Academics refer to this as 'hedonic adaptation' or the 'hedonic treadmill.' As the thrill fades from our latest promotion or purchase, we start hankering after something else -- and so the cycle goes on.

3. Borrowings have to be repaid. This might seem obvious. Yet I wonder what people think as they rack up huge credit-card balances, take out auto loans and borrow against their homes' value. How exactly do they plan to repay all this money? Or do they intend to bequeath these debts to heirs?

4. Fancy cars and expensive clothes aren't a sign of wealth.
Rather, they are a sign that somebody once had money or chose to borrow it. The money has since been spent, and the folks are poorer for it.

5. Your family could prove to be your greatest liability.
You are no doubt well aware of the expense of raising children and putting them through college. Often, however, family costs don't end there. If your adult children or your retired parents get into financial trouble, you'll probably end up bailing them out.

The lesson: Teach your children to save diligently and invest intelligently before they leave home, and don't be coy about talking to your parents about their finances.

6. Investors face three enemies.
And their names are inflation, taxes and investment costs. Indeed, once you factor in these three financial hits, you may find your portfolio isn't making any money.

Let's say you buy a mutual fund that owns bonds yielding 5%. If the fund charges 1% in annual expenses, your yield will be 4%. If you are in the 25% tax bracket, Uncle Sam will take a quarter of that yield, leaving you with 3%. What if inflation comes in at 3%? Put it this way: At least the tax man and your fund manager made money.

7. Adding risky investments can lower risk.
You can figure out your portfolio's performance by simply looking at the results for each investment you own. A portfolio's risk level, by contrast, isn't a straightforward reflection of the investments held.

Consider gold stocks. Yes, they can be wildly erratic performers. But because gold stocks often gain when other investments are suffering, adding them to an investment mix can actually lower the portfolio's overall risk level.

8. Diversification is a mixed bag.
By diversifying broadly, you reduce risk and ensure you will always have a little money in the market's hottest sectors.

But inevitably, if you hold a diversified portfolio, some of your investments will badly lag behind the market averages each year. Find that disturbing? The investments that struggle this year may salvage your portfolio's performance in the years that follow.

9. Not all risk is rewarded.
Both stock funds and individual stocks can post nasty short-term losses. But that's where the similarity ends. If your well-diversified stock funds take a tumble, you can be almost certain that they will eventually bounce back and deliver respectable returns over the long run. But if your individual stocks take a dive, you can't be confident of ever recouping the loss, no matter how long you wait.

10. Most investors fail to beat the market.
You don't need statistics to prove this. Simple logic will do.

Before costs, investors collectively earn the market's performance. After costs, investors collectively lag behind the market. In fact, investors -- as a group -- will lag behind the market by the extent of their investment costs. That doesn't mean you won't earn market-beating results. To do so, however, not only do you have to outwit your fellow investors, but also you need to overcome the drag from your own investment costs. That's no easy feat -- and very few folks manage it over the long haul.

11. Change is costly.
When you sell one investment and buy another, there is no guarantee you will boost your returns. But the change will almost always cost you. To be sure, if you buy and sell no-load mutual funds inside a retirement account, the trade will be cost- and tax-free. But with most other transactions, there's likely to be a fee or tax involved, and possibly both, so think long and hard before you make that next trade.

12. Your best investment strategy is saving.
Even if you're brilliant at picking stocks and funds, you won't pile up a whole lot of dollars unless you have a decent amount invested in the market. The bottom line: If you want to be a successful investor, you first need to be a committed saver.





1. 由簡入奢易﹐由奢入簡難


2. 欲壑難填

學術界將之稱為“享樂適應”(hedonic adaptation)或是“快樂水車”。當升職或是新房新車帶給我們的興奮逐漸消退時﹐我們又會開始去追求別的東西﹐如此周而復始。

3. 欠債還錢

4. 靚車、高檔時裝並非財富的象徵。相反﹐這些東西表明一個人曾經很有錢﹐或者說選擇了借錢消費。花了這些錢後﹐這些人變得更窮了。

5. 你的家人也許是你最大的財務負擔。


6. 投資者的三大敵人。


7. 增加高風險的投資能夠降低總體風險水平。


8. 多元化大雜燴。


9. 並非所有的高風險都有高回報。

10. 多數投資者都無法跑贏大盤。


11. 改變是要付出代價的。

12. 最好的投資策略就是存錢。

Jonathan Clements

(編者按﹕本文作者Jonathan Clements是《華爾街日報》個人理財專欄“Getting Going”的專欄作家)

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