Road to the mountain

A few investment principles

Speculation is an effort, probably unsuccessfully, to turn a little money into a lot. Investment is an effort, which should be successful, to prevent a lot of money from becoming a little.
– Fred Schwed

What matters for successful long-term investing (in order of priority):

1) Staying the course and avoiding big mistakes.

2) Your mix of risky and risk-free assets (e.g., stocks and bonds).

3) Asset allocation (e.g., mix of U.S. vs. international equities, real estate).

“Successful investing takes time, discipline and patience. No matter how great the talent or effort, some things just take time… (Buffett)” Most investing mistakes are due to bad behavior – e.g., losing our nerve and moving to cash in a downturn. We make mistakes when we let our emotions – fear, envy, and greed – rule.

You’ll notice I did not mention selecting winning stocks, identifying talented fund managers, or predicting the direction of interest rates or the economy. All of these require exceptional foresight and a dose of luck. This is extraordinarily difficult to do in advance (which is when it matters).

Investing, however, is that rare field in which disciplined amateurs can outperform professionals over the long run. The key is having a plan and sticking with it through thick and thin. Although there are no guarantees in life or in investing, below are a few investment principles I hold dear.

1) Diversify. Diversify. Diversify.

“[Diversification]…provides scant shelter from bad days or bad years, but…it does help protect against bad decades and bad generations… (Bernstein)” Although correlations often go to one in a crisis, over longer periods of time, diversification is as close to a free lunch as there is in investing.

Takeaway: construct a global, diversified portfolio.

2) Keep costs low and be tax aware.

“In investing, you get what you don’t pay for (Bogle).” Very few active managers and alternative strategies justify their high fees and tax inefficiency. Markets may not be 100% efficient but they are nearly impossible to beat over the long run. You should be wary of anyone who promises you they can.

You want to be tax efficient not tax avoidant. Focus on after-tax, after-fee returns.

Takeaway: use low-cost passive or rules-based ETFs / funds.

3) Stay the course. Market timing is a fool’s errand.*

 “Your long term results are less the result of how well you pick assets than how well you stay the course during the bad periods… (Bernstein).” Staying the course when everyone is euphoric is also crucial. “The first rule of compounding is to never interrupt it unnecessarily (Munger).”

Even expert practitioners with 30-40 years of experience cannot time the market with any consistency. Have enough liquidity (separate from your long-term investments) so you never have to sell your investments in bad times – for example, you lose your job during a prolonged bear market.

Takeaways: have a plan and stick with it. Maintain an adequate safety reserve.

4) Follow the evidence not the story.

We are highly susceptible to narratives. We are more influenced by a compelling story than hard data. And the financial services industry understands this susceptibility. Ignore the narratives. Focus on what’s worked over decades. There’s a mountain of evidence out there if you know where to look.

Takeaways: turn off financial news. Be wary of seductive narratives.

5) Keep it simple.

Investing does not have to be complicated. Complexity makes your investments harder to manage. Plus, an optimal portfolio is only known after the fact. Focus instead on getting the big decisions roughly right (see above).


*if you have a significant liquidity event during a high valuation environment, there are alternatives (e.g., value averaging) that could make sense.

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