Investing 101

  • Educate yourself from teachers not salesmen. Learn about investing by reading these three books: The Little Book of Common Sense Investing, by John Bogle, The Four Pillars of Investing, by William Bernstein, and A Random Walk Down Wall Street, by Burton Malkiel.

 

  • Buy no-load index mutual funds. Research tells us you will come out way ahead of the vast majority of investors by simply owning the markets and feeding your account monthly through an automatic contribution. Identify the wise investments by going to the recommended funds tab on this website. ALWAYS do your research before buying.

 

  • It must have a low expense ratio. All fees (expense ratio) should be under .3%. Strive to get your entire portfolio expense ratio to .1%. Higher returns will follow!

 

  • You must understand what you are doing. Know why you have selected the funds that you own. Here is a simple rule. Can you explain what you own and why you own them to a friend? If yes, continue. If no, go back and further your education on the matter.

 

  • It must fit your goals, time horizon and risk tolerance. Identify these three criteria before investing your money. It always pays to understand the tax consequences of your decisions and whether you need income (retirement) from your investments.

 

  • Diversify your investments. A total stock market index fund and a total bond market index fund will do just fine as you slowly accumulate your wealth. Over time as your pot of money grows you could add a few other funds. These would include an international index fund, an Emerging Markets Index Fund, a REIT index fund, a small-cap value index fund, and a large-cap value index fund.

 

  • Rebalance as needed. Every year or so you should rebalance your investments to get back to the desired asset allocation that you desire. Do this in retirement accounts only to avoid negative tax consequences. You can also add more money to specific accounts as another way to rebalance your portfolio. You can also wait until your allocations are out of whack by more than 10% before rebalancing (my approach). This simply means you would not rebalance until your stock allocations went above or below your desired amount by more than 10%. This tends to reduce how often you rebalance. The less you tinker with your portfolio the better off you will be in most cases.

 

  • Have it all in one. You can invest in a total retirement fund or a lifecycle fund that does everything for you including rebalancing over time. Simply select the fund based on the year that you expect to start taking money out of the account.

 

  • What you should not do? Avoid the self-proclaimed “experts” who take more than they give. This includes your local brokerage company. Companies like: Waddell and Reed, Prudential, Edward Jones, Merrill Lynch, Dean Witter, etc. You do not need them and you certainly cannot afford them. Let’s see what some very wise experts have to say.

 

The Experts

  • Invest in low-turnover, passively managed index funds and stay away from profit-driven investment management organizations. The mutual fund industry is a colossal failure resulting from its systematic exploitation of individual investors as funds extract enormous sums from investors in exchange for providing a shocking disserve. Excessive management fees take their toll, and manager profits dominate fiduciary responsibility. – David Swensen, chief investment officer of Yale University

 

  • Investors, both individual and institutional, and particularly 401K plans, would be far better served by investing in passive or passively managed funds than in trying to pick more expensive active managers who purport to be able to beat the markets. – Professor Edward S. O’Neal, Ph.D., after completing a study in which he found only 2% of actively managed funds beat the market over a 10-year period

 

  • Most individual investors would be better off in an index mutual fund. –Peter Lynch, former manager of the ultra successful Magellan Fund

 

  • Santa Claus and the Easter Bunny should take a few pointers from the mutual-fund industry and its fund managers. All three are trying to pull off elaborate hoaxes. But while Santa and the bunny suffer the derision of eight-year-olds everywhere, actively managed stock funds still have an ardent following among otherwise clear-thinking adults. The continued loyalty amazes me. Reams of statistics prove that most of the fund industry’s stock pickers fail to beat the market. Over the 10 years through 2001, U.S. stock funds returned 12.4% a year, vs. 12.9% for the Standard & Poor’s 500 stock index. – Jonathon Clements, “Only Fools Fall in …Managed Funds?” Wall Street Journal, September 15, 2002

 

  • There are two kinds of investors, be they large or small: Those who don’t know where the market is headed, and those who don’t know that they don’t know. Then again, there is a third type of investor, the investment professional, who indeed knows that he or she doesn’t know, but whose livelihood depends upon appearing to know. – William Bernstein, The Intelligent Asset Allocator

 

  • Index funds have regularly produced rates of return exceeding those of active managers by close to 2 percentage points. Active management as a whole cannot achieve gross returns exceeding the market as a whole and therefore they must, on average, underperform the indexes by the amount of these expenses and transaction costs disadvantages. – Burton G. Malkiel, A Random Walk Down Wall Street

 

  • The investment business is a giant scam. Most people think they can find managers who can outperform, but most people are wrong. I will say that 85 to 90 percent of managers fail to match their benchmarks. Because managers have fees and incur transaction costs, you know that in the aggregate they are deleting value. You want to keep your fees low. That means avoiding the most hyped but expensive funds, in favor of low-cost index funds. Investors should simply have index funds to keep their fees low and their taxes down. No doubt about it. – Jack R. Meyer, former president of Harvard Management Company, who tripled the Harvard endowment fund from $8 billion to $27 billion.

 

  • Most investors, both institutional and individual, will find the best way to own common stocks is through an index fund that charges minimal fees. Those following this path are sure to beat the net results (after fees and expenses) delivered by the great majority of investment professionals. – Warren Buffett, Berkshire Hathaway chairman 1996 Shareholder Letter

 

  • Even as Wall Street belittles your investment abilities, it also wants you to believe you can beat the stock-market averages. This, of course, is contradictory. But it is also entirely self-serving. The more you trade and the more you invest with active money managers, the more money the Street makes. Increasingly, some of the market’s savviest investors have turned their back on this claptrap. They have given up on active managers who pursue market-beating returns and instead have bought market-tracking index funds. But Wall Street doesn’t want you to buy index funds, because they aren’t a particularly profitable product for the Street. Instead, Wall Street wants you to keep shooting for market-beating returns. That is why you should be suspicious when you hear talk of the supposed “stock picker’s market.” – Jonathan Clements, You’ve Lost It, Now What?

 

  • If there are 10,000 people looking at the stocks and trying to pick winners, one in 10,000 is going to score, by chance alone, a great coup, and that’s all that’s going on. It’s a game, it’s a chance operation, and people think they are doing something purposeful… but they’re really not. – Merton Miller, Nobel Laureate in Economics

 

  • Put your long-term faith in open-end index mutual funds. Make regular investments and leave the money alone. Don’t switch in an out in hope of outguessing the market because you usually won’t. Index funds are no-brainers and, for busy people, that’s what investing should be. Eventually, this strategy can make you rich. – Jane Bryant Quinn,Making the Most of Your Money

 

  • If I have noticed anything over these 60 years on Wall Street, it is that people do not succeed in forecasting what’s going to happen to the stock market. – Benjamin Graham (mentor of Warren Buffett), coauthor ofSecurity Analysis

 

  • Surprisingly, one-third of all index funds carry either front-end or asset-based sales charges. Why an investor would opt to pay a commission on an index fund when a substantially identical fund is available without a commission remains a mystery. – John C. Bogle, Common Sense on Mutual Funds

 

  • The single greatest threat to your financial well being is the hyperactive broker or advisor. The second greatest threat to your financial well-being is the false belief that you can trade on your own, online or otherwise, and attempt to beat the markets by engaging in stock picking or market timing. Finally, the third greatest threat to your financial well being is paying attention to much of the financial media, which is often engaged in nothing more than “financial pornography”. This conduct generates ad revenues for them and losses for investors who rely on the misinformation that is their daily grist. – Daniel R. Solin, The Smartest Investment Book You’ll Ever Read