Arthur Zeikel sent his daughter a letter teaching her some investing basics. When this article was originally
published in 1995, he was president ofMerrill Lynch Asset Management in New Jersey:
Personal portfolio management is not a competitive sport. It is, instead, an important individualized effort to
achieve some predetermined financial goal by balancing one's risk-tolerance level with the desire to enhance
capital wealth. Good investment management practices are complex and time consuming, requiring discipline,
patience, and consistency of application. Too many investors fail to follow some simple, time-tested tenets that
improve the odds of achieving success and, at the same time, reduce the anxiety naturally associated with an
uncertain undertaking.
I hope the following advice will help:
A fool and his money are soon parted - Investment capital becomes a perishable commodity if not handled
properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you don't, why
should anyone else?
There is no free lunch. Risk and return are interrelated. Set reasonable objectives using history as a guide. All
returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the
stress of a high-risk portfolio on the way down.
Don't put all your eggs in one basket. Diversify. Asset allocation determines the rate of return. Stocks beat
bonds over time.
Never overreach for yield. Remember, leverage works both ways. More money has been lost searching for
yield than at the point of a gun
Spend interest, never principal, If at all possible, take out less than comes in. Then a portfolio grows in value
and lasts forever. The other way around, it can be diminished quite rapidly.
You cannot eat relative performance. Measure results on a total return, portfolio basis against your own
objectives, not someone else's.
Don't be afraid to take a loss. Mistakes are part of the game. The cost price of a security is a mattet of
historical insignificance, of interest only to the IRS. Averaging down, which is different from dollar cost
averaging, means the first decision was a mistake. It is a technique used to avoid admitting a mistake or to
recover a loss against the odds. When in doubt, get out. The first loss is not only the~ but is also usually the
smallest.
Watch out for fads. Hula hoops and bowling alleys (among others) didn't last. There are no permanent
shortages (or oversupplies). Every trend creates its own countervailing force. Expect the unexpected.
Act. Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves.
Better to be approximately right than precisely wrong.
Take the long view. Don't panic under short-term transitory developments. Stick to your plan. Prevent emotion
from overtaking reason. Market timing generally doesn't work. Recognize the rhythm of events.
Remember the value of common sense. No system works all of the time. History is a guide, not a template.
This is all you really need to know.
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