The Big Lie

The Big Lie says, "Give me your money and I'll make you rich." A (big brokerage firm) may promise a great return, but the accompanying risk is not made clear. In investing, it never pays to take more risk than necessary.

Market timing (i.e., trying to buy individual stocks low and sell them high) doesn't work, but it is universally appealing because it plays both on our fear and greed. Maybe investors are afraid to buy right now, believing the price is going down and they can get it cheaper tomorrow. Or maybe they should sell now but they think its going up and want to get a better price.

The key to successful investing is not market timing or taking more risk. It's simply keeping balance in the portfolio. Only three scenarios are possible in the economy: deflation, inflation or prosperity. During deflation, we may have a recession or a depression.

In deflation, place one third of (your) assets in bonds and cash. For protection in times of prosperity, have one-third of assets in stocks. In times of inflation, seek protection by having one-third in leveraged real estate, especially the primary residence.

The function of our investments is to accumulate and grow our surplus. It's the very basis of capitalism: Every family unit is expected to produce more than it consumes. We should live within our means and save 10 percent. Our savings is the surplus to invest, not to save up to spend later. If (investors) invest their surplus regularly and invest in a balanced portfolio with just a market return over a period of 30 or 40 years, they will have enough to live off the money their money makes, rather than by the sweat of their brow. That's financial freedom.

Truth #1:

The higher investment return always is accompanied by higher risk.

Truth #2:

Market timing inevitably results in higher costs, higher risks, and inferior long-term results.

Truth #3:

A balanced portfolio that includes real estate reduces risk and improves long-term returns.