Maximizing Lifetime Wealth

Many of us spend (ha ha...) countless hours trying to figure out how to maximize our personal lifetime wealth... Here are some ideas to ponder...

First of all, maximizing personal lifetime wealth will require that one maximize savings and minimize current consumption – because of the power of compounding, the more we set aside for investing early on in life, the greater the probability that these savings will grow into a substantial nest egg. In addition, it’s a matter of simple math – the more we will have available to invest, the greater our potential returns will be.

The second most important thing we must do is to invest these savings strategically. Such investments must be well-diversified in order to minimize losses, and the level of risk undertaken must be commensurate with our investor-type. This may of course impact the potential to maximize returns as a more conservative investment approach will, necessarily, reduce returns and vice versa.

Third, we must rebalance our investment portfolio, at the very least on an annual basis, in order to maintain a consistent investment strategy and an appropriate level of diversification.

Fourth, one should only invest in assets one understands, following substantial research that should invoke both fundamental and technical analysis techniques as well as a perusal of analysts’ opinions.

Investing according to the above guidelines should get you on your way towards maximizing your personal lifetime wealth.

Have other ideas? Share them. Comment.

Raging Academic

Finance 101 - Markets are NOT efficient...

One of my famous pet peeves is that - contrary to prevailing academic opinion - markets are not efficient. Kahneman and Tversky are far more "in the money" than Sharpe could ever hope to be... (witness the dismal failure of Long Term Capital Management and the ensuing bailout...)

In my own investing as well as in the finance classes I teach I've taken a "nishtahin nishtaher" approach - i.e. neither here nor there, but rather as a compromise which allows the century long battle between fundamentalists and technical analysts to subside into something manageable. One must carefully analyze the fundamentals - yet make trading decisions based on the basic precepts of technical analysis. Why? Because technical analysis reflects the psychology of the market.

I was glad to come across a series of articles from Investopedia that serve to support my own theory; they are:

Brumley (2006) What can traders learn from investors?

Brumley (2006) What can investors learn from traders?

and...

Vonko (2006) Fundamental analysis for Traders.