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Business // Thinking Smart
David S. Chang

Wise Words On Investing

With people living longer, the greatest risk they face today is longevity risk, or the risk of outliving their money.

In fact, I have some clients who are spending more time in retirement then they did working!

Long-term investing offers some of the best opportunities to grow wealth, fight inflation and help ensure a comfortable future for ourselves and our families so we don’t have to worry about running out of money.

Investing is essentially putting your money to work for you. Since we can’t duplicate ourselves and work more hours for more money, we have to invest in order to maximize our earning potential.

Unfortunately, over the period of 1994 to 2013, the average investor earned only 5 percent while the average stock fund returned 8 percent annually. Why? And how can we get our money to work better for us?

These next two weeks I will cover the essential wisdom of the greatest investors and how you can use them for your benefit.

* “Individuals who cannot master their emotions are ill-suited to profit from the investment process.” -Benjamin Graham, father of value investing and mentor to Warren Buffett.

Ben is saying that we need to avoid destructive investor behavior. Emotions can be our greatest enemy when it comes to investing and wreak havoc on our ability to build long-term wealth. I mentioned that the average investor sacrificed close to half of their potential return.

This gap is called the “investor behavior penalty.” This is because they engaged in negative behaviors like chasing the hot fund manager, stock or asset class, avoided areas of the market that were out of favor, attempted to time the market, or just abandoned their investment plan.

The greatest investors know that building long-term wealth requires the ability to control one’s emotions and avoid self-destructive behavior.

* “History provides a crucial insight regarding market crises: They are inevitable, painful, and ultimately surmountable.” -Shelby M.C. Davis, legendary investor.

History has shown that the stock market will always encounter crises and uncertainty, but the market has continued to go up over the long-term. The greatest investors understand that short-term underperformance and volatility are unavoidable.

Ninety-five percent of the top fund managers from 2004 to 2013 fell into the bottom half of their peer groups, with 73 percent falling into the bottom quarter of their peer groups for at least one three-year period. Even though these professional managers delivered great long-term returns for a decade, almost all of them experienced some difficult short-term stretches.

Investors who understand and recognize this are less likely to engage in the “investor behavior penalty” and make unnecessary and often bad decisions with their investments.

The greatest investors understand that we shouldn’t overreact to short-term fluctuations of the market.

By being disciplined, sticking to your personal investment plan, and avoiding destructive behavior, you are better positioned to benefit from the long-term growth potential of the stock market.

Visit artofthinkingsmart.com for more information.

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