It's Just Like Riding a Bike

“It’s just like riding a bike!” This common phrase is used frequently to describe situations or tasks we think are easy. Of course my sadistic brain thinks, “what if you never learned to ride a bike?” That would mean you have no frame of reference from which to draw. Too often this describes investors I talk with when teaching disciplined investment workshops. I will make reference to the S&P 500 index as if everyone knows what it is and how it functions. At times I will even go as far as to make the joke that it is not a Nascar Race. While that brings a laugh from some, others are confused and don’t even know what Nascar is or stands for. So with that rambling introduction, being in control of your money is a vital step in the process of investing. The phrase, “It’s Your Money – Manage It!” I use all the time. This is my mantra so to speak. If you don’t take control of your money and manage it, who will? Who cares more about your money than you do? No one – so you owe it to yourself to take control of your money.

The greatest challenge in managing your money is dealing with the unknown – the market. When it comes to understanding the investment markets it can become very complex. Therefore, we need to adopt another of my philosophies, “KISS – Keep It So Simple, You Can Do It!” Why make investing your money harder than it needs to be? You need to define a simple discipline for managing your money. When my daughter wanted to learn how to dive into our swimming pool, she first had to learn the simple task of falling into the water versus jumping into the water. The point is she needed to learn the simplest of tasks first. This gave her the confidence she needed to go to the next step. At each interval she could make it more and more complex if she so desired. You as an investor have to learn the simple steps first and then add complexity. I have been investing money for nearly 30 years and I still like to keep it simple. The simpler the better from my perspective, because it affords me the ability to understand and that understanding in turn gives me confidence when investing my money. Just as my daughter learned that keeping her head down and falling into the water avoided the ever famous – belly flop, you too can learn to invest your money with confidence.

Here is a simple strategy you can try and see how it works for you. Take the S&P 400, 500, 600 indexes, investing in each will give you exposure to the small, mid and large cap stocks in the US stock market. Then add the EAFE index which introduces the international markets and last add the Shearson Lehman Bond Index for fixed income (bonds). For simplicity sake, let’s put 20% of our money into each position. This allows you to diversify your money and track five indexes. This is important from a time management view as well as money management. If one of the indexes moves into a downtrend you will trigger a stop (an exit/sell at a predetermined point) and the money will be put in a money market. We can then wait for the index we exited to return to an uptrend and invest our money again. This is a simple enough strategy to follow. All you have to understand is what the indexes are, how to look at a chart of each to determine if the trend is up, down or sideways, and last determine how much risk you are willing to take in each investment, then setting a stop or exit point accordingly. Most investors could learn this in short order and take complete control of their money. In doing so they would also understand what is happening with their money and gain confidence as time goes by. You can then learn to add complexity if your desire, this is simply a starting point. From there you can learn to dive off the 35 meter platform and do triple flips with backward twists. You can make the dive as complex as you are willing to learn or you can simply dive off the side of the pool and enjoy the swim.

“It’s just like riding a bike!” First you have to learn how to ride a bike and control the balance of two wheels while peddling. Once you learn this you can take it to whatever level you desire. The challenge for some us is we want to go down the ramp like they do on ESPN extreme sports and jump doing wheelies and landing perfectly at the end. If you don’t learn how to ride first you will be on the highlight reel from ABC sports – “the thrill of victory and the agony of defeat.” You will be the later part – the agony of defeat in this instance is losing your hard earned money because you made it more complex than you were ready to deal with or understand. Keep It So Simple, You Can Do It!