Principles always defeat greed and fear

Much is being said about the current uncertainty that exists within American financial markets. Is it the mortgage malaise? Is it the election? Is it a decline in solutions designed to buoy American spending? Is the American consumer upside-down with more debt than they have the capacity to repay? As the pundits debate, many consumers are afraid to act and some are dealing with recovering from their last consumption binge. How do we stand on solid financial ground at times like these? The answer, “The same way we always have, by following our principles and living our values.”

I tell my students that financial success is not hard. It does not require brain-surgery. Nor, does it require one to know how to conduct brain surgery. One must simply follow the recipe and the recipe is DDT: discipline, diversification, and time.

Discipline requires us to have a plan and do our best to stick to our plan. We spend money to reflect our values, not those of others. We set goals and are disciplined in establishing and supporting a savings program to help us reach our goals. We live within our means and only use credit as a convenient way to purchase, being certain to pay balances off at the end of the month. If we use credit as a source of long-term borrowing, we only do so if the proceeds are used to invest in something with a high probability of return – such as a college education. Discipline requires us to set rules and to play by the rules. We don’t cheat. We don’t steal. We don’t take advantage of others. We do what is right and keep our eyes on the goal.

Diversification is essential to a successful investment program. We can spend time in future financial tips discussing particular diversification ideas but, for now, we simply want you to consider how important it is for your savings and investing program to involve investments in many different companies and different types of assets. We never know which type of investment will do best this period but do know that one will. As such we must have money invested in such a way as to take advantage of the risks that exist within world financial markets. Certainly, mutual funds are very useful for diversification but assuring that your mutual funds cover various segments of the market with respect to firm size, industries, and national markets is crucial.

Time, as you should know, not only heals but is a key to investment success. The miracle of compounding cannot occur, without adequate time. A prior colleague of mine once said, “If you want to take the volatility out of your portfolio, check its value less often.” Too often people react to market movements by panicking at the worst possible moment. When their portfolio is down, way down, they panic and sell. On the other hand, we see some being too optimistic and over committing funds to a particular investment type when the “winning investment parade” is about over. Risky investments require time and should only be used when one has the time to let the market fluctuations work themselves through.

What I am trying to say is to follow your principles. Do not be swayed by today’s fears or the greed you taste observing the luck and/or excesses of others. Set your goals. Chart your path. You will reach your destination.

- Rob Weagley, Ph.D., CFP(r)Chair, Personal Financial Planning