Ten simple money rules for investing success

Lists can help organize your thoughts. I have created them for everything from rules for investing to financial phrases to avoid. As someone who has spent decades thinking about money – saving it, investing it and spending it – I have come to recognize several fundamental truths about money that I have compiled into a list:

Investing is both simple and hard: The basic premise behind successful investing is easily understood: "Invest for the long term, be diversified, watch your costs and let compounding work its magic." But following through can be challenging.

Humans are plagued by an inability to just "sit there and do nothing." Failing to do so leads to costly errors and loss of capital that erode returns. Understanding what is required is very different than being able to perform, regardless of circumstances, for decades on end.

Which leads us to rule No. 2:

Behavior is everything: The inability to manage  emotions and behavior is the financial undoing of many. To paraphrase William Bernstein, "the extent you succeed in finance is based on your ability to suppress your limbic system. If you can't do that, you're going to die poor."

Even the greatest stock pickers will underperform if unable to control their emotional impulses. Allowing emotional hot buttons to get pressed is how people go wrong in investing. There are no shortcuts, secrets or get rich quick schemes that work, not even those three-day workshops that promise to reveal the secrets of the ultra-rich for a "nominal" fee.

Moderation in all things: Think of the majority of the assets in your portfolio -– hopefully a diversified, global mix of passive index funds -- as the basic meat and potatoes of investing from which you can add seasonings, herbs and vegetables. Want to do some early stage investing in tech start-ups? Maybe some real estate speculation? Perhaps a bit of private equity investments in non-public businesses? Maybe even a fun trading account?

Barry Ritholtz. Illustration: TBS

I don't have a problem with any of that as long as it meets two conditions. First, you should understand that the odds of success are against you. Many billions of dollars are aggressively competing in the same space for returns. The professionals are always searching for an edge, and even with one, there are no guarantees of success.

Second, it should be a smallish chunk of your liquid net worth, perhaps about 5% to 10%. That is enough to provide you a little fun and intellectual stimulation. Some might even discover a knack for such investing. But the amounts should be small enough that if the investment doesn't work out it won't affect your financial plan.

Risk and reward are inseparable: Risk is best defined as the probability of your returns differing from your expected outcomes. The problem is that many investors want better-than-market returns while assuming minimal risk. But returns are a function of the risks assumed.

Risk-free U.S. Treasuries yield almost nothing. To do better, own equities. But that adds volatility to your portfolio. If you seek higher returns, you can add low beta stocks that have the potential to do better – or worse – than the market as a whole.

Spend less than you earn: Budgeting is simple: Income goes on this side of your household balance sheet, expenditures on that side and make sure the latter is lower than the former. It's that easy!

I have zero tolerance for the spending scolds who tell you never buy a boat, don't get a new car (especially a sports car), and avoid buying lattes. This lazy, ignorant and poor advice given by charlatans and frauds who do not understand math or finance. If they did, they would add the magic phrase: "…if you cannot afford it." But if you can, then spend your money however you like but preferably thoughtfully. People often skip purchases they can afford out of misplaced guilt.

Leverage kills: Using borrowed money for nearly anything is the negative manifestation of the three prior rules. Yes, get a mortgage to buy a house you can afford. But never use borrowed money to buy speculative assets that are subject to further capital calls.

Understand your role: The markets are populated by all kinds. There are traders and investors, hedgers and speculators, and everyone has different risk tolerances, time horizons and financial goals. Do not assume what any of America's 800 billionaires have to say about investing is especially relevant for your needs. Their goals are likely different from yours.

Be aware of your limitations: What gets so many investors into trouble "is not what we don't know, it's what we know for sure that just ain't so." Understanding the limitations of your cognitive errors and belief systems is just the start. It's also important to know what inadequacies you have financially, emotionally and behaviorally. Operating outside of your own capabilities is a good way to run into trouble. 

Own it: You are responsible for your own financial well-being, not the Federal Reserve, the government or whichever huckster is yelling the loudest at the moment. You alone accept responsibility for your investments and spending. The sooner you take ownership of your financial circumstances, the better off you will be.

Invest in yourself: This is the most important investment you can make. Educate yourself, develop an expertise and add to your professional skill stack. And invest in your future by making sure you fully fund your retirement accounts every year. Make those long-term investment needs before spending on short term wants (that's as much of a scold as I can muster).

After making my list, I asked Twitter folks for their favorites. The result was hundreds of suggestions. Consider them an ala carte menu showing both breadth and depth.

My final admonition is the most important rule: "Behave!" As noted throughout, ill-advised decision making and poor behavior are the biggest reasons why many fail to meet their financial goals. All of the above either directly or indirectly refers to behavioral issues dressed up in the lexicon of finance.

After making my list, I asked Twitter folks for their favorites. The result was hundreds of suggestions. Consider them an ala carte menu showing both breadth and depth.

My final admonition is the most important rule: "Behave!" As noted throughout, ill-advised decision making and poor behavior are the biggest reasons why many fail to meet their financial goals. All of the above either directly or indirectly refers to behavioral issues dressed up in the lexicon of finance.

Go make a list of rules, then follow it. Your future self will thank you.

1. Archegos Capital Management was running about 5-to-1 leverage, then blew up quite spectacularly, losing $20 billion and wiping out founder Bill Hwang.

2. For example, that above quote, often ascribed to Mark Twain, is more likely unknown.

3. The lesson taught in high-performance driving schools is the importance of operating within the capabilities of both the vehicle and the driver.