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The Secret to Investing

...is not really a secret. Just a few important things that investors must keep in mind.

W. Scott Simon, 08/01/2013

W. Scott Simon is a principal at Prudent Investor Advisors, a registered investment advisory firm. He also provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. Simon is the recipient of the 2012 Tamar Frankel Fiduciary of the Year Award.

In my meanderings around the country through the retirement plan marketplace, I am sometimes asked "What is the secret to investing?" My reply is that there is no secret--on the contrary, investing is quite straightforward and simple. There are just a few important things that you must keep in mind.

Of course, investing is very confusing to many people because it is made to be so by those that will benefit from such confusion. For example, much of the investment media--TV shows, online blogs, newspapers, magazines, etc.--likes to confuse people. Bewildered investors are more likely to turn to the media in desperation and buy their products that promise to provide The Secret to Investing.

In addition, much of the investment advisory profession--not following business models that require advisors to be fiduciaries to their clients--tends to favor the interests of such advisors ahead of those of their investor clients. Not being bound by either a "best interest" or a "sole interest" fiduciary standard can more readily lead investment advisors to sell products to their clients that are imprudent--whether too costly, too risky, too illiquid and/or too opaque, et al. That certainly cannot have any relationship to The Secret to Investing.

Pssst, Here's the Secret
Although my views on The Secret to Investing are aimed at investors as participants in retirement plans, they are also germane (as relevant) to taxable investors outside of plans. In addition, many (perhaps most) participants are not enrolled in retirement plans with low-cost and low-risk investment options. That doesn't change the validity of the following points, however.

1. Maximize the Amount of Plan Contributions
The amount of money that a plan participant and its employer contributes to the participant's 401(k) plan is the single most important thing that the participant can do to amass a pot of gold that will generate a sufficient income stream in retirement. Nathan Bedford Forrest, one of the Confederacy's most astute cavalry generals of the Civil War, was (erroneously) purported to have said that the secret to his success in battle was to "git thar fustest with the mostest." Historians agree that Forrest never spoke that way; what he really said was, "I got there first with the most men."

In the same way, plan participants will enhance the odds of having a better retirement if they make retirement plan contributions a) as soon as they can ("gitting thar fustest") and b) with as much money as they can ("with the mostest")--thereby subjecting such contributions as long as possible to the advantages of long-term compounding. Participants are quite literally in a race to contribute as much money as possible, as soon as possible, by the time they retire. Their contributions (and any other savings that they may have outside their retirement plan)--turned into income--must last them for their life expectancy, potentially far longer beyond the day that they retire.

2. Keep Investment Costs Low
Participants in retirement plans offering low-cost investment options can control costs.

W. Scott Simon is an expert on the Uniform Prudent Investor Act and the Restatement 3rd of Trusts (Prudent Investor Rule). He is the author of two books, one of which, The Prudent Investor Act: A Guide to Understandingis the definitive work on modern prudent fiduciary investing.

Simon provides services as a consultant and expert witness on fiduciary issues in litigation and arbitrations. He is a member of the State Bar of California, a Certified Financial Planner, and an Accredited Investment Fiduciary Analyst. Simon's certification as an AIFA qualifies him to conduct independent fiduciary reviews for those concerned about their responsibilities investing the assets of endowments and foundations, ERISA retirement plans, private family trusts, public employee retirement plans as well as high net worth individuals.

For more information about Simon, please visitPrudent Investor Advisors, or you can e-mail him at wssimon@prudentllc.com

The author is not an employee of Morningstar, Inc. The views expressed in this article are the author's. They do not necessarily reflect the views of Morningstar.

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