INVESTING IS A TOXIC mix of fear and overconfidence that’s colored by the recent past and driven by unfounded forecasts. Want to introduce a bracing dose of rationality? Start by thinking about what you can control—and what you can’t.
Your investment performance has three components: There are the raw returns you earn, the risks you take to earn those returns and the costs you incur along the way. Most investors focus heavily on returns. Wall Street does everything possible to fan this interest, because investors’ relentless pursuit of market-beating returns is a great moneymaker for brokers, fund companies and money managers. But the reality is, there’s no surefire path to beating the market, and the harder you try, the worse your results are likely to be, because of all the investment costs you incur.
What’s the alternative? You might focus less on returns and more on building a portfolio that avoids unnecessary risk and minimizes investment costs, including tax costs. Unlike returns, risk and costs are two aspects of investing over which you have a lot of control and where a little effort can pay big dividends.
To be sure, there are all kinds of strategies that will supposedly allow you to beat the market. For those who want to delve more deeply into that topic, check out the chapter devoted to financial markets. Even this part, where we’ll look at the basics of portfolio building, has the potential to overwhelm and befuddle the novice. But, as you’ll discover in the sections ahead, you can keep yourself on track if you think of portfolio building as a simple four-step process.
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