Fail-Safe Investing

Lifelong Financial Security in 30 Minutes

St. Martin's Press

Contents

RULE #1

Build Your Wealth upon Your Career

Working together, your career and your investments can build a prosperous, secure future. But never forget that your wealth begins with your career—the way you make your day-to-day living.

If you save enough from your business, profession, or job, you eventually may earn more from investing than from working. But unless you first pay attention to working and saving, you'll never share in the wealth that investing can bring.

You might see advertisements claiming that investing just a few thousand dollars will put you on the road to riches. But investing is the second part of the road. The first part is the money you earn and save from your job. Rarely does someone make a large fortune from investments alone.

And common sense tells you it has to be this way.

Think about your own occupation, for example. Could someone without your training, your skills, your experience, and your talent outperform you at your job?

Of course not.

And yet too-good-to-be-true advertisements invite you— an amateur with no particular education, training, or experience in speculation—to compete, in your spare time, with professionals who have devoted their entire careers to investing, and who continue to eat, breathe, and sleep investing every day.

The sad fact is that most part-time investors who try to beat the markets lose part or all of the savings they've worked so hard to accumulate. Some of them wind up using their working income to cover investment losses—and maybe even working overtime to do so.

When the quick-money approach does produce gains, the profits usually are smaller than if you had simply made a few conservative investments and left them alone.

Could you beat the pros by reading a book or a newsletter?

You tell me. Did Luciano Pavarotti become the world's leading tenor by studying a book? Did Babe Ruth learn to hit home runs by subscribing to a newsletter?

Can you make big profits by relying on an expert who does have the proper qualifications?

How do you identify a true expert? That task is no easier than picking the right investments. If you don't understand investing as well as the pros, you won't know how to evaluate those who seek to advise you. And you can't rely on an advisor's track record, even when it's presented honestly. Track records tell you only how advisors did in the past—not how they will do next year.

Violating the Rule

You're violating Rule #1 if you think your investments can be the sole source of your retirement wealth—or if you steal time from your work to manage your investments—or if you think about abandoning your job to become a fulltime investor.

Why You Must Invest

Does this mean you can't achieve anything by investing?

No, quite the contrary: Investing can do so much for your future that it would be a terrible shame to squander its true opportunities by chasing after rainbows.

Investing wisely can amplify and enhance what you earn by your labor. And it is the only thing you really can count on for your senior years. You can't depend on Social Security to take care of you.

Social Security operates on a simple principle:

You give your retirement money to politicians and they squander it on something else.

They may spend it on someone else's retirement—or on building monuments to themselves—or on programs to curry reelection support from special-interest groups. But the one thing they will never do is put your money in a trust fund earmarked for your retirement.

Social Security operates on a basis that would send the owners of any private insurance company to prison: It expects to repay your "contribution" with money it will take from someone else later. As the years pass, it becomes harder and harder to keep this pyramid scheme going.

The system will be reformed someday—and perhaps even completely taken away from the politicians. But the sad and silly history of politics warns us that real reform won't happen until the system is close to collapse. In the meantime, the only changes will be to reduce benefits, delay the retirement age, or increase taxes.

The closer you are to retirement now, the bigger chance you have to get something back from Social Security. But, in general, the safest way to consider the matter is to assume you won't get anything—and then treat anything you receive as found money.

You can count on for your retirement only what you put away yourself. And you must make sure that what you put away is safe and growing at a healthy rate.

Fortunately, if you handle your investments properly, you can count on them to finance your retirement—and more. And the younger you are, the easier it is to provide a good retirement—and the less reason you have to worry about Social Security.

Benefits of Investing

If you apply common sense, your investments can:

1. Assure you of a secure and comfortable retirement.

2. Enhance your life before then—perhaps by providing a better home, a better education for your children, or whatever may be important to you.

3. Allow you to leave something substantial for your heirs.

Investing won't promote you from the middle class to the very rich. Most people who hoped it would do so have wound up worse off. So don't take risks with complicated investment schemes in the hope of multiplying your capital quickly. Instead, set up an investment plan:

• That protects and enhances what you've earned at your job, and

• That isn't so complicated you'll be tempted to abandon it.

In other words, keep it safe and simple.

If you do that, you'll be free to concentrate on what you do best—free to make a great deal of money in your career.

RULE #2

Don't Assume You Can Replace Your Wealth

If risky investments turn out badly and you lose everything you have, you might be able to earn it all back again. But don't count on it.

Yes, you know far more now than when you started your career, but success always depends on conditions you don't control. And those conditions are constantly changing. Markets change, technology changes, the competition changes, consumer tastes change, and laws and regulations change.

You earned your wealth because your talent and effort harmonized with the circumstances in which you found yourself. But the world won't stand still for you or repeat itself when you need it to.

As time passes, government finds new ways to interfere with your business, your profession, and your life. Expanding regulations and the litigation explosion combine to make businesses much more vulnerable today to surprises and sudden disasters. And advances in technology change the demand for your products or service.

So assume that what you have now is irreplaceable, that you could never earn it again—even if you suspect you could.

Recognize, too, that without prudence whatever wealth you've accumulated is vulnerable to the same kinds of surprises—litigation, regulation, investigation, market setbacks, changing tastes, or just plain misjudgment. So you need to find a way to protect your savings from every eventuality—a task that, fortunately isn't as daunting as it might seem.

You're violating Rule #2 any time you think it's okay to go for broke with the savings you're counting on for the future— or when you treat your wealth with anything other than the utmost respect.

Protecting what you have requires setting up an investment program whose first priority is to preserve what you've worked for—making sure you don't take chances with the part of your wealth that's precious to you.

No matter how much or little you have now, it's possible to assure that you'll never lose it—as we'll see in Rule #11.

But the first step is to recognize how precious your wealth is, and resolve to say "No!" to any proposition that asks you to risk losing it.

RULE #3

Recognize the Difference between Investing and Speculating

Investors often get into trouble by speculating when they think they're investing. If you don't understand the difference between the two, you can put yourself in a dangerous situation.

When you invest, you accept whatever return the markets are paying investors in general.

When you speculate, you attempt to beat that return—to do better than other investors are doing—through clever timing, forecasting, or selection. The implicit assumption is that you have knowledge or talents other investors lack.

You're investing when:

• You hold a long-term position in the stock market with no attempt to time your investments or to determine which sectors of the market will perform best.

• You keep your savings in a money market fund or a bank account.

• You hold a balanced portfolio, with a variety of investments, so that at least one will do well—and keep your portfolio afloat—in any economic climate.

You're speculating when:

• You select individual stocks, mutual funds, or stock market sectors you believe will do better than the market as a whole.

• You move your capital in and out of markets according to how well you think they'll perform in the near future.

• You base your investments on current prospects for the nation's economy.

• You use fundamental analysis, technical analysis, cyclical analysis, or any other form of analysis or system to tell you when to buy and sell.

Investment advisors and writers often refer to "safe investments" when they're really talking about speculations. And no matter how they assure you that a given speculation involves little risk, it is still a speculation.

The distinction between investing and speculating is important. Any attempt to beat the return available to others must, by definition, also involve the risk that your return will be smaller than what the market is offering effortlessly—or even that there will be no return at all.

As we proceed, I hope you'll see why I want you to understand the difference between investing and speculating. Both are honorable endeavors, but only one of them is suitable for the funds you're basing your future on.

There's nothing wrong with speculating—provided you do it only with money you can afford to lose. But the wealth that's precious to you—the money you're counting on for retirement-should never be risked on a bet that you can outperform other investors.

RULE #4

Beware of Fortune-Tellers

We live in an uncertain world.

Whenever you make a decision—whether in your business or personal life—you're always dealing with incomplete knowledge. You may make the best choice you can, but you know you can't control the actions of other people. Nor can you know for sure how other people will react to future events.

That doesn't mean you can't make sensible decisions, can't succeed, or can't live a happy and prosperous life. Even though you can't eliminate uncertainty, you know there are ways to deal with it. In fact, you have dealt successfully with uncertainty in amassing the money you now have to invest.

Because no psychic or seer can tell you what the future holds, you make decisions in your business and personal life using whatever knowledge is available. Respecting uncertainty, you make choices that let you capitalize on opportunities, but with safeguards that protect you from being hurt too badly if things don't turn out as expected.

You take a job knowing that tomorrow's economic conditions may eliminate the company's need for what you do. Or you start a business with no guarantee that the marketplace will be kind to you. You marry, acquire friends, pick a place to live—all without any certain knowledge of how your choices will turn out.

Most of us live that way—and live well. You would never rely on someone who claimed to predict the outcome of these activities. It wouldn't make sense.

You know that if someone could predict the future, he'd be off somewhere making billions of dollars betting on sporting events or advising corporate giants—not offering his predictions to you for $ 100 or so.

Most people understand that true seers don't exist in the real world.

Forsaking What We Know

And yet, when contemplating your investments, it's easy to think you must find a fortune-teller with an outstanding "track record"—one who can predict future stock prices, next year's inflation rate, or the direction of gold prices.

You won't have to look very far to find someone who claims to have a foolproof way to know which way the markets are moving. The investment world is overpopulated with seers who claim to have amazing forecasting records.

But you'll find that the advisor with a perfect forecasting record up to now will lose his touch the moment you start acting on his advice.

Investing is no different from the rest of life. Investment prices flow from the decisions of millions of different people. Investors and advisors have no more ability to foresee those decisions than psychics or fortune-tellers do.

As with the rest of your life, safety doesn't come from trying to peer into the future to eliminate uncertainty. Safety comes from devising realistic ways to deal with uncertainty.

You're violating Rule #4 if you believe a certain event has to come about—or that a given investment can't fail—or that you have good reason to know that some apparent risk simply won't materialize—or that someone out there knows which way the market will move next year.

The truth is simply that:

Anything can happen.

Nothing has to happen.

The beginning of investment wisdom is the realization that we live in an uncertain world—and that no one can eliminate the uncertainty for you.

Once you recognize that simple truth, you will look for ways to assure that the uncertain future won't hurt you—no matter what it turns out to be.

Then you'll be able to relax, free from worry that future surprises could destroy your savings—no longer afraid that you may act on the wrong prediction.

In Rule #11, we'll see how you can handle uncertainty.

RULE #5

Don't Expect Anyone to Make You Rich

Perhaps it is unrealistic for you, investing part-time, to expect to outdo the professionals. But couldn't you beat the game by using a professional's advice?

If you read many investment publications, you could easily conclude that this is what you should do. There are plenty of stories about Wall Street wizards who can get you into and out of investments with skillful timing. And so many of them seem to have outstanding track records.

But I hope you'll heed what others have learned the hard way:

The investment expert with the perfect record up to now will lose his touch as soon as you start acting on his advice.

Investment advisors come in many garbs—such as stock and commodity brokers, newsletter writers, financial journalists, money managers, and financial planners.

No matter what their occupational titles, they fit into two groups:

• Helpers: People who use their knowledge and experience to help you set up an investment portfolio that suits your needs, and to show you how to carry out your plans.

• Market-Beaters: People who recommend speculations to help you obtain a greater return than the markets are offering to others.

Of course, some advisors do both.

Helpers

The Helper is worth listening to. He or she can acquaint you with investment alternatives you weren't aware of, and that might be a good fit for you. He can teach you the mechanics and procedures for getting things done in the investment world. He can raise the questions you need to answer in order to devise a portfolio that suits your needs. He can help you reduce the tax bill on your investment profits.