Quest for Alpha: The Final 10 Rules for Being a Successful Investor

Last Updated Feb 4, 2011 5:02 PM EST

(The following comes from the appendix Rules of Prudent Investing in Larry's most recent book, The Quest for Alpha, which presents compelling evidence on the failure of individual investors, mutual funds, pension plans, venture capital and hedge funds in their efforts to outperform the market. For the remaining list of rules, see the posts 10 Rules for Being a Successful Investor and The Next 10 Rules for Being a Successful Investor.)
  • The market can remain irrational longer than you can remain sol­vent. Bubbles do occur. However, investors should never attempt to short them because, while bubbles eventually burst, they can grow larger and last longer than investor resources.
  • If it sounds too good to be true, it is. When money meets experience, the experience gets the money and the money gets the experience. The only free lunch in investing is diversiï¬?cation.
  • Never work with a commission-based adviser. Commissions cre­ate the potential for biased advice.
  • Work only with advisers who will provide a ï¬?duciary standard of care. That is the best way to be sure the advice provided is in your best interest. There is no reason not to insist on a ï¬?duciary standard.
  • Separate the services of ï¬?nancial adviser, money manager, custo­dian, and trustee. This minimizes the risk of fraud.
  • Since we live in a world of cloudy crystal balls, a strategy is either right or wrong before we know the outcome. In general, lucky fools do not have any idea they are lucky. Even well-thought-out plans can fail because risks that were accepted occur. And risks that were avoided because the conse­quences of their materializing would be too great to accept may not occur.
  • Hope is not an investment strategy. Base your decisions on the evidence from peer-reviewed academic journals.
  • Keep a diary of your predictions about the market. After a while, you will conclude that you should not act on your "insights."
  • There is nothing new in investing, just the investment history you don't know. The knowledge of ï¬?nancial history will enable you to anticipate risks and incorporate them into your plan.
  • Good advice does not have to be expensive; but bad advice always costs you dearly, no matter how little you pay for it. Smart peo­ple don't choose the cheapest doctor or the cheapest CPA. Costs matter; but it is the value added relative to the cost of the advice that ultimately matters.
Excerpted with permission of the publisher John Wiley & Sons, Inc. from The Quest for Alpha: The Holy Grail of Investing. Copyright 2011 by Larry Swedroe. This book and e-book is available at bookstores, through Amazon and Barnes & Noble and from the Wiley Web site.
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    Larry Swedroe is director of research for The BAM Alliance. He has authored or co-authored 13 books, including his most recent, Think, Act, and Invest Like Warren Buffett. His opinions and comments expressed on this site are his own and may not accurately reflect those of the firm.