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Dieting and investing: Simple, but not easy

(MoneyWatch) The keys to a successful diet are well known and simple: reduce the amount of calories you take in, and increase your exercise level. Despite the simplicity of the winning strategy, far too many people go through life succeeding for short periods, only to lose the discipline required to stay the course.

In "Get Smart or Get Screwed", friend and author, Paul Merriman wrote that over his life he had lost (and gained) about 4,000 pounds. He had purchased almost every major diet book that came out over the past 50 years, and he had participated in more weight-loss programs and gone to more gyms than he could count. He related that his experiences had taught him lessons that apply to investing. Being a huge fan of analogies, I thought I would share Paul's insight.

Paul noted,"for most people losing weight is a struggle between emotional decisions driven by our subconscious minds and the iron laws of biology and physics. We humans are wired to believe that we need certain things, and this is very difficult to counteract, even when we rationally know better."

The same things can be said about investing. The winning strategy is well documented and simple -- using only low-cost, tax efficient, passively managed funds, build a globally diversified (across multiple asset classes) portfolio that is tailored to your unique ability, willingness, and need to take risk, and have the discipline to stay the course. Yet, even legendary investor Warren Buffett noted that while investing is actually simple, it's not easy. It's not easy because we're human beings, almost hard wired to make mistakes.

"Investment Mistakes Even Smart People Make and How to Avoid Them" covered 77 such mistakes. And we're especially vulnerable to mistakes caused by emotions that lead us to make bad decisions. Bull markets lead to emotions such as greed and envy taking over from our rational self -- which can result in taking more risk than we should. Bear markets lead to emotions such as fear and panic taking over from our rational self -- which can result in what I call "portfolio suicide."

Merriman put it this way: "You can think of investing as a struggle between the emotions that drive us -- hope, fear and greed being three prominent examples -- and the iron laws of mathematics and probability."

He also noted another interesting analogy between dieting and investing. When it comes to losing weight, there are the multibillion dollar food and restaurant industries whose best interests are counter to your objectives. Similarly, the interests of Wall Street and most of the financial media run counter to the interests of investors. They need you to pay high fees and stay "tuned in" to what is nothing more than noise.

The good news is that both the diet "game" and the investment game can be won by following simple strategies. You just have to have the knowledge about them and the discipline to adhere to them. When it comes to dieting, there are some who can succeed on their own, while others can succeed only with the help of a coach or personal trainer. Similarly, there are some investors who can succeed on their own, while others need the help of a professional advisor. If you think you're in the DIY group, my column of June 14, 2012, provides insights into the requirements of being a successful investor. On the other hand, if you find yourself in the latter group, there are advisors who are worthy of your trust. My column of June 10, 2009 provides advice on the due diligence process you should follow.

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