There is a huge mistake of putting too much money in your own company, industry or stocks that correlate with your own industry.  If you are in the oil industry, you should not be buying oil as a commodity, because when the price of oil goes down, your job, business and portfolio will suffer.

This is diversification and it is free.  There’s no loss in expected return from doing this.  Many advisors jump to what is the magic alpha or the new way to beat the market before doing the basic homework of insuring your risk.

It’s principle one and it is the most important and underappreciated thing

Principle two is to think for the long run.  Most investors have 10 or 20 years in mind for their investment objectives.  Much of the theory and the old way of doing things didn’t distinguish between short- and long-run results.

Let me tell you a story to make this clear.  Suppose you want to send your child to the University of Chicago 10 years from now – a good thing!  The risk-free way to do this, to make sure you pay our hefty tuition, is to invest in a 10-year indexed zero-coupon bond – TIPS.

You put the money down and in 10 years you have the money to pay the tuition. Problem solved.

But now here’s the mistake many investors make.  A new crisis happens and interest rates go up.  Of course the value of your investment just fell like a stone.

You open the envelope and panic and say “oh my goodness, we’ve lost all our money and we can’t afford to send our kid to the University of Chicago any more.”

Of course, this is absolutely false, because when the price of a 10-year bond goes down the yield goes up and you will still have exactly the same money at maturity.

But your investment objective was to hold to maturity.  If you need the money a year from now, this was a bad investment.  But if you need the money 10 years from now, the 10-year TIPS was the risk-free asset.

So long as you remember to not open the statements.

Buy-and-hold holds a lot more than people think it does. Many very sophisticated investors are regretting their panic in the financial crisis, when they sold at the bottom because they didn’t understand that many things that had fallen in value would recover based on their investment objective.

My bond story was to show that this principle applies more generally: think for the long run. Don’t think one-by-one and panic.

Put in a plan for the long run and hold, rather than necessarily buying-and-holding.  But most investors I know, especially wealthy and very sophisticated ones, do far too much fiddling around.

I think buy-and-hold is fairly sensible advice.

Finally we can have some fun!  It is true that the CAPM doesn’t work, but it works better than you think.  If someone is promising better returns, the first question is what is your beta?  Did you synthesize those great returns by simply leveraging up a passive index?

But there are strategies that will pass that test.  Let me use value stocks as an example.  It is true and 20 years of empirical work has found that value stocks outperform and they don’t have a greater beta – a greater tendency to fall off when the market falls off.  Of course they also fall; they are not entirely risk-free.

For you to invest in value stocks, you are taking on another dimension of risk.  There will be a time when the market has gone up and your value stocks have fallen.  You have to face your buddies and say what a stupid thing you did.  But there will be more times when the market was flat and value stocks went up.

Value is a great example. There are other dimensions of risk you can think about taking if they are appropriate for you that generate a premium that isn’t explained by the market.

But that comes only as step three.  First, make sure you are not neglecting “house insurance.”  Second, make sure you are thinking for the long run and not panicking over the short term.  Check that your investments really do outpace the market in a good old CAPM way.

Finally, do some fun things like value investing where you can take on other dimensions of risk – not pure profit - and enhance your portfolio.