Nine Ways to Manage Money Effectively

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By SHEFALI ANAND, The Wall Street Journal

(Nov. 20) - You get the idea.

As a columnist, my goal isn't to report the news or to offer up an ever-changing list of experts' investment recommendations. Rather, there are some key financial insights that, I believe, should guide everyone's investing, and I pound away at them week after week.

I have been talking about some of these ideas for years, while others have only recently captured my imagination. Want to manage your money better? Here, I would argue, are nine of the most important financial ideas.

1) Just Say No

To save and invest successfully, nothing is more critical than self-discipline.

That means settling on a mix of stock, bond and money-market funds and then sticking with that mix, no matter how unnerving you find the market's daily turmoil and no matter how tempted you are to buy the latest hot stock.

More important, you also need the ability to delay gratification, so you save a healthy sum on a regular basis.

2) Get Off the Treadmill

You can't spend your way to happiness. But lots of folks try, setting themselves up for a lifetime of hefty credit-card bills and emotional disappointment.

You know the cycle: You see something in the store, you decide you just have to have it, you pony up the bucks and, a few weeks or months later, the purchase is all but forgotten -- and you're hankering after something else.

Academics refer to this as the hedonic treadmill. The lesson? If you want happiness, you won't find it at the shopping mall.

3) We Are the Market

Despite all the talk of beating the market, there's a devastating piece of logic that stands stubbornly in our path.

We can't all beat the market, because collectively we are the market. If somebody beats the market, somebody else must lag behind.

In fact, once investment costs are figured in, there are very few winners and most of us trail the market averages.

4) Their Gain, Your Pain

All this should be a reminder that, like it or not, you have two investment partners: Wall Street and the taxman. The three of you divvy up your investment spoils.

Want to keep more for yourself and pay less to the Street and to the taxman? Your best bet is to clamp down on investment costs and make the most of tax-sheltered retirement accounts.

5) Help Wanted

A decade ago, I would have argued that most investors were capable of investing on their own. I no longer believe that's the case.

It seems most folks don't have the time, interest and emotional fortitude to invest successfully on their own.

But unfortunately, you may not fare much better if you hire a broker or financial planner. Many advisers charge too much and have had scant formal financial education, so you really need to pick your adviser with extraordinary care.

6) Don't Be Left Behind

When experts argue the case for diversification, they will point out that buying a wide variety of investments can lower risk, because some of these investments will post gains when others are suffering.

The problem: Whenever we get a major financial crisis, diversification -- especially global stock-market diversification -- often proves pretty much useless, because everything plummets at the same time.

Yet I think this misses a key point. Even if, say, U.S. and foreign stocks tend to rise and fall in tandem, there are often startling differences in their annual return. Those who own just one market can end up suffering long periods of lackluster performance.

Moreover, diversification isn't just about tempering short-term swings in your portfolio's value.

You also want to limit the damage done by financial calamities, whether it's political upheaval that shutters a country's financial markets or the sort of devastating market collapse we saw in Japan in the 1990s.

7) Family Matters

Your children are your legacy. They will inherit your money and they will likely adopt your financial values.

Your family is also your greatest asset and your greatest liability. If your children or your parents get into financial trouble, you would likely help out -- and they would likely help you, should you get into difficulty.

It's worth keeping all this in mind. Talk to your elderly parents about their finances. Endeavor to teach your kids about money.

Think about how you manage your own money -- and what the consequences would be for your family, should something go badly wrong.

8) Invest for the Long Term

If you die young, it could be financially devastating for your spouse and children. But don't ignore the other risk: What if you live far longer than you ever imagined?

Many retirees are so concerned about dying young that they rush to claim Social Security early and they refuse to buy lifetime-income annuities. And this is indeed the right strategy if you're convinced that you and your spouse have a short life expectancy, and you want to die a little richer.

But what if you take Social Security early, don't buy the annuity and then live a surprisingly long time? Instead of dying young and rich, you could be very much alive -- and pinching pennies.

9) Last Resort

On days when the financial markets are open, I check the yield on inflation-indexed Treasury bonds every few hours.

As of Friday, for instance, 10-year inflation-indexed Treasurys were yielding 2.3 percentage points above inflation.

To me, inflation-indexed Treasurys are the investment against which all others should be measured. If I buy 10-year inflation-indexed Treasurys, I am guaranteed to beat inflation by 2.3 percentage points a year over the next decade.

Unless I am confident that another investment will outperform this benchmark, I stick with inflation bonds. They are, to me, the investment of last resort.