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Here's where it gets difficult for most of us -- in fact, very difficult.
Intuitively, we understand the importance of sticking to our plan. Yet "we're constantly
receiving conflicting messages about how to be successful investors. For example, the
mutual fund industry tells us that: � Professionals have the best chance of
picking stocks that will outperform, and � A mutual fund that has outperformed the
market in the past is likely to outperform the market in the future.
"At the same time, the discount brokerage firms are telling us that:
� Picking stocks on your own is easy! And, � with up-to-the-minute information, you
can time the market successfully.
"Meanwhile, the mainstream financial media is bombarding us with a third group of messages:
� Like: you can improve your performance by picking hot funds (particularly, those
mentioned in their show or magazine), and � If you watch the news enough and listen
to enough economists/market analysts, you have a good chance of predicting the next
market move.
�So whom should we believe? Each of those sources seems like they should know what they're
talking about.
"The reality is that the primary goal of each of those parties is not to provide us with
quality information, but rather to persuade us to consume their products (just like any
other business). So we must tune them out and turn instead to unbiased sources of information
(like academic studies). When we do, we encounter a few findings that have been confirmed time
and again: � Within each category of mutual funds,
expenses are the best predictor of future performance.
� Any investor--even a full-time professional--is unlikely to be able to reliably outperform
the market. � and, Reliably predicting short-term market
moves is impossible.
And those facts lead us to this simple common-sense investment strategy:
1. Develop a workable plan 2. Start saving now, not later. Time is your
friend when you use the wondrous growth power of compound interest.
3. Own the appropriate amount of bonds. It is the ratio of stocks to bonds that controls
your risk. This is far more important than which specific funds you choose.
4. Diversify, and hold on to your investments for as long as you possibly can before selling
them. 5. Never try to time the market.
6. Use index funds when possible. 7. Keep all costs low, not just sales costs,
but the recurring expense ratio, and hidden tax consequences.
8. Taxes are a very big cost that you can minimize, or defer.
9. Keep it simple. 10. And hardest of all: Stick To Your Plan!
"Stay the course" means that once you've chosen your portfolio, only sell to rebalance and
maintain your risk level. Never sell based on greed or fear.
Imagine that you wake up tomorrow morning and the stock market is down 50% due to some
huge global problem, like a nuclear war in the middle east, what will you do? If the
answer is "sell" when it is down 50% then you have too much in stocks. You are carrying
too much risk.
A written Investment Policy Statement helps you rebalance in a market drop. Everyone is
different. Not everyone can be cool in the line of fire. But knowing your limitations
ahead of time and being able to admit them and select an appropriate level of risk and
a plan that you can stick with is a wonderful pursuit of self knowledge.
You can do this! Now when you get a question, and you will, you can turn to the Boglehead
wiki. The Bogleheads have endearingly named themselves after John C. Bogle, the great
champion of common sense investing. You can look him up. Or, you can find answers to common
questions, or books that are worth reading. And if you can't find your answer you can
always anonymously ask the Bogleheads discussion board -- a group of friendly people that are
amazingly generous with helpful feedback (to people with genuine questions).
Tune out the noise. Stick to these ten simple guidelines. Investing is just a small piece
of fully living your life, but it's an important piece. It enables you to reach some of your
most valued dreams.
Find other explanatory videos, smart tips, and links to useful resources at FinancingLife.org.