Buy Funds

To this point, you’ve been exposed to several passive learning opportunities (primarily reading), and some active learning (through the use of simulated trading software).

Presumably, you’ve also opened a real trading account and you know how to buy and sell financial securities such as stocks, bonds, mutual funds, and ETFs.

Congratulations!

Before you get too full of yourself, however, you must recognize that you now know enough to be dangerous. Just because you know how to buy or sell a variety of investment instruments doesn’t mean you should do so.

Our basic human emotions represent some of the greatest dangers to our investments. This is explained at an intuitive level in my book Play to Prosper: The Small Investor’s Survival Guide and at a more technical level in Jason Zweig’s Your Money & Your Brain. By learning how to execute trades easily, we have potentially unleashed the monster within. The passive investor must remain disciplined. S/he must resist the seductive force of buying the latest hot stock or trendy but fatally misunderstood derivative product. The discipline to stick with the plan is your most important first line of defense against poor decision making. Guard it. Worship it. Preserve it.

You may be thinking: He’s trying to scare me. Why is he trying to scare me now, just when we’re getting to the real thing?

I’m not trying to scare you. I’m merely ensuring you’re fully alert for this stage. While this is a serious step forward, there is no need to be scared or intimidated. By carefully applying everything you’ve learned the process should be quite easy. By this time you should be comfortable that long term, diversified passive investing is right for you. You've also identified appropriate funds in which to invest, and ideally confirmed with the help of a financial planner, accountant and lawyer that your approach accounts for all important factors. The only potential source of anxiety should be concerns about errors in trade execution.

Before any transactions are finalized you should have an opportunity to examine them carefully and confirm them. Even on the odd chance that you have to reverse a trade (this has happened to me once in the last decade) you may do so quickly and cheaply, by paying for one more transaction (a fee likely to be under twenty or thirty dollars). Of course this cost doesn’t account for value declines in the instrument you purchased in error. On the other hand, you could also realize an inadvertent value gain by the time you reverse the transaction. By confirming the trade minutes after it’s been executed you can ensure it’s the correct one or reverse it on the rare occasion that a mistake had been made. Over those few minutes it’s highly unlikely that a large price movement will occur.

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