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1-Page Summary of A Wealth of Common Sense
Overview
Maybe in another world, it’s possible to become rich instantly. But that’s not the case here. If you browse the Internet for investment advice, some experts will tell you about fairy tales and how to get rich overnight—but they’re wrong. You can become a successful investor if you use common sense and follow these steps: (1) create a solid investment plan; (2) compose your personal portfolio; (3) diversify your investments based on what you want to achieve with them and who you are as an investor.
Additionally, you’ll find out about common mistakes and how to avoid them. You’ll also learn why Yale’s investment strategy won’t work for most people; the benefits of not worrying about your investments; and that you’re not Marty McFly—and what that means for your portfolio.
Big Idea #1: Investors aren’t all equal.
People often look at the investment strategies of companies that are doing well and try to implement them for themselves. However, there are many reasons why these strategies don’t work for individual investors.
Institutional investors have lower trading costs because their size gives them leverage to negotiate with investment platforms. Additionally, they can afford full-time staff members who manage their portfolios on a day-to-day basis. Individual investors simply can’t do this.
All institutional investors are not the same. The amount of money that they have varies widely, and so do their deals as a result. Take Yale University for example. It has hundreds of millions in donations every year, which is managed by David Swensen, its chief investment officer. He’s done very well with his portfolio management style because he earns 14 percent gains every year since the mid-1990s and has even earned his own name: the “Yale Model.”
Most universities can’t afford to invest as much money as Yale does. And only large-scale investors like Yale have the funds necessary to get into low-fee investments that are attractive because of their fees. Yale is not only a large university, but also a nonprofit organization. Nonprofits benefit from additional advantages over other investors, such as having no time limit on when an investment will pay out and being exempt from paying taxes on capital gains.
Individual investors should invest in a way that is different from the institutional giants. Individual investors need to find their own investment strategies, and they must avoid common mistakes.
Big Idea #2: To start your investing journey, you need to know what not to do.
Many books explain what investors need to do in order to be successful, but few reveal the mistakes that people make. And yet avoiding those mistakes can have a significant impact on your success. According to financial advisor Nick Murray, if you correct common investor mistakes, you can boost your investment returns by 3 percent or more each year.
If you want to get rich, don’t expect it to happen immediately. It doesn’t work that way! People who claim they have the key to instant success are either fooling themselves or trying to fool other people into following them. Don’t listen to them!
Overconfidence is also a common mistake. Predicting markets can be difficult because there are so many uncontrollable variables. Investors who overconfidently assume they know how the future will turn out tend to make poor decisions about their investments and lose money after only a few months.
It is important to resist the temptation of doing what everyone else does. After all, if so many people are doing it, it can’t be wrong! Unfortunately, that’s not always true.
