Stay Diversified

The stock market is not a zero-sum game. There are not winners and losers in these markets, with the winners taking all the spoils and the losers going broke. Mr. Goldie says, "Capitalism generates positive returns overall, and, although some win more than others, everyone can win. The elegant truth of economics is that the return on capital is exactly equal to the cost of capital. In other words, in the aggregate, the return to investors is equal to the payment required of those entities, such as governments and corporations, seeking to attract investment capital."

Wealth is created when natural resources, labor, intellectual capital and financial capital combine to produce economic growth. As an investor, you are entitled to a share of that economic growth when your financial assets are invested in and used by the global economy. This is not a free lunch. It is your fair share of profits as compensation for putting your money to work.

Mr. Goldie follows by saying, "One of your main goals should be to capture as much of the global return on capital as you can. I believe the jost reliable way to accomplish this is to be fully diversified in many asset classes around the world. You want to efficiently capture specific risk dimensions, and the associated returns, of the global capital market while minimizing friction costs, such as trading expenses and tax costs."

Diversification can also help reduce portfolio volatility. If the securities in your portfolio do not move in tandem with each other, the offsetting price movement can reduce overall volatility. This is an important part of building wealth because reduced downside movement results in increased compounding and greater ending wealth accumulation, all else equal.

Avoid Mistakes

Errors dominate the investment world. The preponderance of successful investors did not grow their wealth because of brilliant decisions; they grew it by avoiding mistakes. Financial blunders can be costly to those who choose to learn the hard way. According to Mr. Goldie, "The market is a great teacher, but it charges a steep tuition."

Errors are best avoided by maintaining a disciplined approach. But discipline is elusive and it is easy to understand why. Volatile markets seem to offer many apparent opportunities to buy low and sell high, and there is no shortage of brokerage firms and others offering to help you try your luck.

What they don’t tell you is that markets work and that there is little evidence that stock picking or market timing beats market returns. This approach, and all others that rely on forecasting or concentrated betting, is speculating, not investing.

Investing involves putting your money to work in the capital markets in an efficient manner so as to capture, as reliably as possible, the return on capital delivered by the economic system.

Do this for the long haul and you will be a successful investor. Teach it to your kids and you will have given them a great financial gift.