Principle #16 - Invest In Your Education

There is a statistical correlation between formal education and both income levels and wealth. This is logical - education makes better paying jobs accessible. People who earn more do, on average, accumulate greater wealth than those with lesser degrees of education. There are, of course exceptions. But the averages show a positive correlation between academic achievement and financial achievement.

Education does not start and stop with schools and universities. Education, especially self education, is a life long affair. The world changes. Financial markets are in a state of constant change. Ideas that were profitable or sensible investment strategies at some times can and do become unprofitable or imprudent at other times. Education means keeping your knowledge of the markets and the forces that move the markets up to date. It means being ready to adapt to new ideas.

We live at a point in history which has been described as the information age. The internet and other technologyl advances have made more information available to more people more quickly and cheaply than at any point in history. This makes it both easier to keep on top of developments and inexcusable not to. How many books on investments or related matters do you read each month? How much time do you spend reviewing the wealth of information which is available for free on the internet? How much time do you spend discussing investments with your friends and other acquaintances? All of these are forms of education.

Principle #15 - Procrastination Costs Money

Procrastination will usually cost you money. Procrastination takes many forms. The most extreme is simply to put off saving and investing. A simple understanding of the power of compound returns and the time value of money will show how expensive a mistake this can be.

As an example: a person who saves $2000 in the first year (increasing at 3% a year to simulate wage increases) and who earns a return of 8% on her investments will amass a nest egg of $738,499 after 40 years. A person who delays starting the same savings program will end with a nest egg of $677,931. The early saver ends up being $60,569 (8.9%) better off. Not bad for a mere $2000 extra saved. (The example is a bit simplistic in that it assumes that all the savings are contributed at the end of each year. Monthly savings would result in a larger difference.

In the quest to get even a small increment in return on investment, more subtle forms of procrastination can also be expensive. Examples abound:

1. leaving money in accounts which pay no interest or lower rates of interest than can be obtained elsewhere;
2. taking out longer term loans than are needed (although this one does depend on what you do with the additional cashflow);
3. failing to pay the credit card off in full each month.

Any others?

Principle #14 - Deal With Your Mistakes

Mistakes are a fact of investing life. We will make investments which turn out badly - either because we made poor decisions or simply because the future did not turn out as we expected.

Mistakes cannot be avoided. Even putting your money in the bank or buying government backed securities does not make you imune from the possibility that your investments will turn out badly. Consider what happened to investors in bank deposits and bonds when the first and second oil shocks arrived in the 1970s - the real value of both deposits and bonds suffered a noticable decline.

The way to deal with mistakes is to recognise that some investments will go wrong and accept that risk as the price for trying to achieve a more meaningful return on your investments. One of the critical issues in dealing with mistakes is to deal with the mistake quickly. Usually this means taking losses early and not letting a bad situation get worse or allowing capital to be tied up in a losing investment for long periods of time.