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Understanding Investments: 7 Tips

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By John Vineyard

Once you're on the tenure track, in addition to positioning yourself for a program of lifetime savings, you should resolve to become conversant with certain basic issues of markets and investing and to continue your financial education in some reasonably serious fashion. Here are a few of the bedrock principles you should master:

Keep investment expenses low. Investment gains are uncertain, but most fees charged by brokers are not. Too many investment vehicles, such as mutual funds and insurance plans, require a big fat fee upfront and leave you to wait for the possible gains. Nothing inhibits the long-term growth of your retirement assets more than high brokerage commissions, high mutual-fund sales commissions and management fees, excessive losses through overactive trading, and chasing investment fads.

Resist the allure of "hot" investment advice. There are entirely too many newsletters, magazines, books, columns, and hucksters posing as market sages. If someone is saying, "Have I got a hot one for you," you have to ask yourself, Why is he or she trying to sell it to you instead of keeping it? Keeping that simple question in mind will help you avoid many traps.

Maintain a steady investment posture despite market fluctuations. If you review the investment tone of most financial newsletters and advice columns over a year or more, you are likely to be astonished by the range of moods that most of them cycle through in just a matter of months. The same column that was gloomy last month is suddenly bullish. Following their every mood swing is likely to leave you constantly shifting your allocations and always somehow just behind the trend. So except for extraordinary events that may occur once in a decade or once in a generation, it's probably better to maintain allocations appropriate to your age and long-term prospects.

Seek a source of good investment advice. Alas, you won't be able to find such advice just by looking at the flurry of solicitations you receive via e-mail, regular mail, or television. This is a protracted process of getting to know your comfort zone financially and talking to people who have found good sources of advice.

Regularly review your position and progress. At the very least, read those quarterly reports from your retirement account.

Know yourself and your ability to tolerate risk. People vary a good deal in their ability to tolerate the day-to-day and month-to-month volatility of investments. You won't change your personality, but knowing more about markets will help you sleep better. In my experience, the people who have been a little braver and a little more confident in their investing have almost always ended up with more than the people who were on the other end of the spectrum.

Make it a lifetime project to deepen your understanding of how markets work. This doesn't have to be onerous. Perhaps having a subscription to The Wall Street Journal or The Economist and skimming it regularly will do. Keep in mind that financial markets represent the most efficient process of bringing together spenders and savers around the world. Market prices contain enormous amounts of current information because they represent the combined wisdom of all the people who are willing to actually bet their own money on their views regarding major economic trends.