By Burton Malkiel
1. Market Efficiency: Financial markets are largely efficient, meaning prices reflect all available information. Predicting short-term movements and outperforming the market consistently is extremely difficult.
2. Randomness Rules: Stock prices exhibit random walks, influenced by unpredictable news and investor emotions. Technical analysis and short-term market timing are generally ineffective.
3. Focus on Long-Term: Successful investing relies on a long-term horizon, weathering market ups and downs. Don’t be swayed by short-term fluctuations or get caught up in “hot stocks.”
4. Index Funds are Champions: Low-cost index funds, which passively track broad market indexes, consistently outperform most actively managed funds in the long run due to lower fees and diversification.
5. Beware of Fees: High fees erode investment returns significantly. Choose low-cost index funds and actively managed funds with proven track records and reasonable fees.
6. Diversification is Key: Spread your investments across different asset classes (stocks, bonds, real estate) and sectors to minimize risk and smooth out portfolio returns.
7. Emotions are Enemies: Fear and greed are detrimental to smart investing. Stick to your long-term plan and avoid impulsive decisions based on market noise or emotional highs and lows.
8. Dollar-Cost Averaging is Powerful: Invest a fixed amount regularly (weekly, monthly) regardless of market conditions. This helps buy more shares when prices are low and fewer when they’re high, averaging out your cost per share.
9. Rebalance Regularly: Maintain your desired asset allocation by periodically rebalancing your portfolio. Sell off assets that have outperformed to buy those that have lagged, keeping your risk profile consistent.
10. Invest Early and Consistently: Start investing early, even with small amounts, and contribute regularly over time. The power of compounding interest allows even small investments to grow significantly over the long term.
Bonus Lesson: Be skeptical of financial gurus and “hot tips.” Do your own research, understand the risks involved, and choose an investment strategy that aligns with your financial goals, risk tolerance, and time horizon.
Remember, these are general lessons, and individual circumstances may differ. It’s always advisable to consult with a financial advisor for personalized guidance.
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