Over the years, I have worked with individual investors of all kinds, spanning a wide range of affluence. In that time, some distinct principles have emerged about how wealthy investors successfully protect and grow their assets in up and down markets.
These techniques are available to a broad investor population, and the success factors are not hidden or complicated. But they require attentiveness, focus, flexibility, and discipline.
First, you need to know yourself
-- your personal characteristics (such as family responsibilities, working age, and chronological age), your mentality and investment temperament, how you deal with losses and gains, your affinity for investing, and some idea of your ability and willingness to tolerate risk.
Second, you need to truly diversify your investments
, with a judicious, appropriate mix of assets that are uncorrelated. That means they don't all move in the same direction at the same time. You'll have some winners and some losers, but over time your aim is to achieve more victories than losses.
Third, from time to time, you have to rebalance your portfolio back to the long-term strategic asset allocation mix
that fits your risk profile, your goals, and your financial personality. Rebalancing requires selling assets that have rapidly appreciated in price, and buying quality assets that have declined in price. This generally affirms the principle of "buy low, sell high," and helps to keep your portfolio on track.
Fourth, pay attention to portfolio protection and risk management
, by: insisting upon having good asset managers (especially in the less efficient
, such as
, emerging market equities, real estate, hedge funds, and venture capital); being mindful and vigilant of what could go wrong in an investment instrument or an investment plan; and seeking out some form of protecting the portfolio, through the use of above-normal cash positions,
, and negatively-correlated asset classes that zig when others zag (such as precious metals, commodities, managed futures funds, and inflation-indexed securities). Some of these investments may not be suitable for all investors.
Finally, you need a trusted, wise, independent, caring person
to bounce ideas off of, who wants to see you do well, and who will keep you on the road when you begin to veer onto the shoulder or into the ditch.
was written for one major purpose: to protect your assets in any kind of market environment, while helping the value of your portfolio grow over time.
Among the special features I've included in the book are:
A rundown of the key features of the 11 major asset classes, including the specific benefits and drawbacks of owning them (page 28).
An asset allocation clock, telling you what kind of assets to emphasize in periods of inflation, deflation, economic growth, and economic retrenchment (page 32).
Shortcuts for calculating the pretax portfolio return you will need - factoring in the impact of inflation - to live within your means after you retire (page 80).
The ten simple but critical questions you should ask in evaluating and selecting an investment manager (page 124).
The five essential questions you should ask of someone who is acting for you in evaluating and selecting the investment manager (page 125).
A mapping of the interplay between Human Capital (your occupational earnings stream) and Financial Capital over your working lifetime (page 147).
Seven common pitfalls and how to avoid them (Chapter 13) and a description of the action steps you could and should take to get started right now (Chapter 14).
Three simple questionnaires: a self-profile; a review of your investment outlook; and a recap of what kinds of investments might be most suitable for you.
And last but not least, a six-page chapter (Chapter 2) helping you identify your wise counselor (your "Uncle Frank"), as well as many pithy "Shout-Outs" of advice and wisdom from Uncle Frank himself throughout the book.
Never before have investors had such efficient, low-cost, transparent ways to access today's global markets for stocks,
, currencies, commodities, real estate, inflation-indexed securities, and many other asset classes. That being said, I felt there was a crucial need for investors of every kind to have a GPS system that could help navigate the world's financial highways, streets, lanes, and boulevards. I've sought to make
The Little Book That Saves Your Assets
precisely that indispensable tool -- something that all investors could use to reach their own personal destinations.
The Street.com TV: How the Rich Stay Rich
To watch the video, click the player below:
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David Darst is Morgan Stanley's Chief Investment Strategist.
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