The Deep, Dark Mysteries of Investing Revealed

Investing for the Financially Challenged: How to Become Rich Using Your Bankers Money
by Walter Updegrave

If you think Ginnie and Fannie Maes are Southern belles... covering shorts is about underwear...and a tender offer is something you give to Ginnie or Fannie, you need... Investing For The Financially Challenged

If phrases like "pre-refunded municipal funds" and "collateralized mortgage obligations" make your eyelids feel like they weigh a ton, this book is for you. A solid, concise primer that recognizes your fears, cuts through the jargon, and steers you away from double-talking "pundits," Investing For The Financially Challenged is brought to you by one of Wall Street's most informed and easily understood experts, Walter Updegrave, a senior editor at Money magazine. Updegrave gives you the kind of sound advice your mother would have given you (Eat your vegetables, wear a hat in the sun, and build a diversified portfolio.)...all the while putting you squarely on the road to financial stability, security, and freedom.

Chapter 1

Exposing Wall Street's Most Closely Guarded Secret

Okay, I want your undivided attention now because I'm about to reveal a secret that could put hundreds of thousands of stockbrokers, money managers, investment planners, and financial journalists out of business. Ready? Psst! Investing is actually pretty damn easy. We're not talking brain surgery here. The basic principles and strategies you must master to invest successfully are embarrassingly simple. Which is probably why investment professionals spend so much time trying to make the investing process seem more complicated than it is.

Think about it: you really have only two big decisions to make. The first is how you should divvy up your money among the three main classes of investment assets: stock funds (or individual stocks), bond funds (or individual bonds), and cash (essentially money-market funds, though bank accounts and short-term certificates of deposit would also qualify) .The answer to that one is determined largely by how much you can tolerate seeing the value of your investment portfolio drop over the short term if the stock or bond market falls apart and how long you plan to keep your money invested before you start tapping your investment accounts for cash. The longer your money will be invested, the more you should tilt your mix toward stocks. The shorter the time period, the more toward bonds. Not exactly rocket science.

The second big decision is what specific stock funds (or individual stocks), bond funds (or individual bonds), and cash investments (money-market funds) you buy once you've determined the answer to question number one.

With more than 5,000 stock funds, 3,700 bond funds, and 1,100 money-market funds to choose from - not to mention thousands of individual stocks and bonds - this question may seem complicated. But the beauty of investing is that you don't have to pick the absolute best ones to succeed. Fact is, "pretty good" is a plenty high enough standard when it comes to picking investments. And average ain't bad, either. Consider this: If at the beginning of 1980 you had invested $10,000 in a stock mutual fund that earned just the average return for all funds that invest in a broad range of U.S. stocks, by late September 1998 your ten grand would have grown (before taxes) to just over $140,000. That translates to an average annual return of about 14.3 percent. Most people would--and should--be happy to settle for those kinds of numbers.

So if investing is so easy, you may ask, why do so many people screw it up? That brings us to another little-known fact about investing: What stands between most of us and investing success isn't our inability to master the principles of investing; it's our inability to master ourselves, by which I mean the emotions, mental lapses, and psychological quirks that often subvert our thinking process and make us do dumb things. In short, it's our behavior as much as the financial market's that ultimately determines whether we make or lose money over the long run. Don't believe me? Read on.

Stop Looking at the Market and Start Looking Inside Yourself

For years economists assumed that whether we were choosing a car or picking stocks or funds, we acted in a perfectly rational manner. That is, we gathered information and, with our brains whirring away like Pentium processors, arrived at a consistent and logical choice. To everyone but economists, this was obviously not true. Evidence abounds that we make all sorts of illogical and inconsistent decisions. People who claim to like music buy Michael Bolton albums. We not only elect politicians who later prove themselves to be of dubious integrity, but we reelect them. With a few notable exceptions, however, most of us don't make boneheaded decisions because we're dumb, we make them because a variety of mental and emotional quirks we never think about screw up our thought processes.

In recent years a number of economists, psychologists, and other researchers have begun to explore the way our brains work when we grapple with questions like investing. The result is an emerging academic discipline called psychoeconomics. Not to be confused with economics for psychos, psychoeconomics attempts to shed light on the irrational psychological tendencies and predilections that can lead us to make lousy decisions. I'm not going to claim that by understanding your emotional and psychological peccadilloes you'll be able to rid yourself of them and always make logical, clearheaded choices. But if you at least know a bit about how subconscious impulses might lead you awry, you stand a better chance of guarding against the errors in judgment they help cause. In this section I've outlined four common psychological mistakes or traps that we can all fall prey to:

The Fraidy-Cat Syndrome: Psychologists and economists who study individuals' behavior when weighing financial alternatives have found that most of us experience about twice as much pain from losses as we do pleasure from gains. In other words, we fear losing 10 percent on an investment twice as much as we look forward to gaining 10 percent. At the same time, most people, even when they're investing money for long-term goals, tend to check the results on their investments frequently, sometimes as much as weekly or even daily.

© 1999 by Walter Updegrave

About the Author

Many financial experts trace their interest in money to a gift of stock or mutual fund shares they received as a birthday or high-school graduation gift. Not me. No one in my family owned stock or mutual funds, let alone had enough to give away. My route to writing about investing was a bit more indirect.