A Wealth of Common Sense summary

While many books explain what you need to do as a successful investor, few reveal what not to do. And yet being able to avoid bad habits and silly mistakes can have a huge impact. According to financial advisor Nick Murray, investors who correct common mistakes can boost their yearly returns by 3 to 4 percent.

If there’s one thing you should avoid from the outset, it’s expecting to get rich fast. Today, we’re nothing short of obsessed with discovering the key to immediate wealth. Truth is, it doesn’t exist! Anyone claiming to have the secret to instant success is either fooling themselves or attempting to fool you. Don’t pay attention to them!

You might consider yourself fairly intelligent. But is this enough to achieve success? Depends. Despite what you might think, a high IQ isn’t the only marker of intelligence. It’s emotional intelligence that will keep you afloat.

Emotional intelligence is the ability to recognize and manage our own feelings and those that exist between people, says psychologist Daniel Goleman. In other words, we need to know how our emotions influence our actions and the people around us. But what does this have to do with investing?

Risk is a word that gets thrown around a lot by investors. But it can mean many different things to different people. For some, risk is tied to losing money, whereas others see it as volatility. But in every case, risk is always attached to rewards, a relationship which also shapes your investment choices.

To put it simply, greater risks yield greater rewards. In other words, don’t expect big payouts when you play it safe. And by the same token, be prepared for a bumpy ride if you’re hunting big rewards. Nothing is free! This is the case with different asset classes in investment.

Ever taken a personality quiz? They’re a lot of fun, and they can come in handy when you start investing! Why? Because investors need to define who they are and find the label that fits them best.

Are you a trend follower, a short-term trader or a diversified asset allocator? The list goes on, and it’s your job to find one that fits your personality like a glove. Ask yourself what your core investment values are, and whether a certain style fits your behavioral habits and personal situation. Are you a risk-taker? Or do you want to hold your assets for years?

Have you seen Back to the Future Part II? In this film, Marty McFly travels to the future and buys a record of sports statistics to take back to the past. Armed with the knowledge of every sports event in the “future,” he hopes to make a killing betting on the results. But, unlike Marty McFly, we have no idea what the future will hold. But we can make our bets safer by investing in a diverse range of assets.

By diversifying across different asset classes and risk factors, we can prepare ourselves for the worst. If anything goes wrong in one class, our losses will level out through the gains made in the other classes. Having your portfolio spread across multiple assets might mean you miss out on extra big gains when one of your assets does well, but this is an acceptable sacrifice to make to safeguard yourself against going broke.