12 Things You Must Absolutely Know Before Investing Again Part 2

Tip #7: Engage In Insider Trading (Legally)

If you have a very important piece of information about the market or a company that no one else has, you should consider trading on that information. There’s nothing illegal about trading on secret information that you discovered through your own hard work or just dumb luck. In fact, this is one of the only ways anyone can ever beat the market.

Here’s the catch: Don’t do this if the information is about a company you work for or your spouse works for. And don’t even do this if you have an obligation to another third party, like if you work for a financial publication that’s about to write a favorable article about a company. If you got the information from someone related to you or who expects to gain from your trading, be aware that that also could violate SEC rules governing trading on non-public information. If you are uncertain, talk to a lawyer (who will probably tell you not to do it) or just don’t trade.

But don’t fall prey to the common misconception that you cannot trade on non-public information. You can and you should. Having knowledge that others lack is a very, very good investment strategy.

Tip #8. Don’t Buy The “Hot Stocks ”

It seems almost unavoidable. Every year business magazines run features on the hot stocks or hot sectors for the coming year. You shouldn’t even read these.

The only thing these will do is distract you. By the time the story is in the magazine, the knowledge is already widely disseminated. Markets are efficient enough to price this in as well.

The same goes for investing on the advice of a guy like Jim Cramer. By the time the market opens the next day, a hot stock from Cramer is already priced too high.

If you must invest in “hot stocks,” here’s how to do it: wait a month or two. If the stock drops back down and you are persuaded it’s a good investment, go ahead. But the key is to avoid the initial rush of dumb and manipulative trading that goes
on after the tip is first announced.

Tip #9: Read Your Quarterly Statement. Ignore Most Of It

No one likes to read the statements from their financial statements when the market is down. They’re ugly. They make you feel stupid. They make you feel poor.

But you need to read your statements. Just not for the reasons most people think. You shouldn’t read them for the returns from the last quarter. That’s just noise that may make you panic and sell at the wrong time.
You need to read them to keep track of the fees. Believe it or not, some funds and brokerages know that people don’t read statements during bear markets and they will raise fees during that time hoping investors won’t notice. So read the fees section and ignore the returns.

Tip #10: You Can Negotiate Anything

If you are signing on to a big mutual fund, you will have to pay the fees they require. (Remember: most mutual funds are rip-offs, so only go with low fee funds.) But if you are opening a brokerage account, you will have room to negotiate your fees.

Financial advisers will tell you that the fees are fixed. They’ll say that they can’t change them. They’ll show you where this is all written down.

Don’t believe them.

There are many different fees brokerages offer, and they are not obligated to give you the cheapest one. The rules just say it must be appropriate to you. You should haggle with your broker to get the lowest fee you can.

When they give you a quote on the fees, start by telling them: “These aren’t the fees I’m looking for.”

Tip #11: Invest In Low Cost, Passively Managed Life Cycle Funds. Reinvest Your Dividends

If all this seems like a lot of work—welcome to invest.

The single best thing you can do is probably invest in a low-cost, passively managed “life cycle” fund that adjusts your asset allocation as you age. This is really, really boring. But unless you are willing to do a lot of hard work, it is the absolute best thing you can do. Even if you are willing to do a lot of hard work, you should consider it. You might be over-estimating the value of your hard work.

If that’s too boring for you, find a brokerage that offers a low-cost investment account offering a variety of services. Beware, however, that some of those with reputations for offering low-cost accounts also offer high-cost accounts. You need the lowest cost account at the low-cost brokerage with a good reputation.

You should reinvest the dividend in your fund. Every year you should re-examine the fees and every five years ask them to help you analyze the asset allocation. If you get married, lose your job, buy a house, get divorced or have a child, you’ll want to re-examine the allocation.

Tip #12: You Can’t Beat The Market And You Don’t Want To

Now here are the three most important things you should know.

You can’t beat the market. If you were hoping that you’d learn how to “beat the market” by reading this investment advice, you’ll be sorely disappointed. Nothing here will help you beat the market. At best, if will help you not fall too behind the market. Very few people can actually beat the market–and most who do just got lucky.

You don’t really want to beat the market anyway. The good news is that you don’t have to beat the market. That’s actually a pretty arbitrary measure. What you really want to do is save some of your money for later, and not let it lose value thanks to the passage of time and the cumulative effect of inflation. That’s your real goal with investing. Not beating something or someone. Not getting rich quick. It’s investing prudently for the future.

Returns Might Be Worse Than You Expect. In the past, diversified investing strategies have paid off moderately well even after taxes and inflation. But in the future, this might not hold true. In fact, because of demographic changes, changes in the spread of information, changes in the age of the average investor, and a decade of stagnant or declining stock markets, we may be in for a long bear market. Spikes will reward the lucky market timers, and you may occasionally get lucky. But don’t count on stocks or bonds to go up along historical trend lines forever.

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