How To Invest

Keep_it_simple_smartyRather than say, “this is how you should invest,” I prefer to say (and write about) “this is how you should NOT invest.”

I can think of at least three reasons for my preference.

First, I know many more terrible ways to invest than I know good ways.

Second, exotic bad ideas make for more interesting conversation (and reading) than boring good ideas.

Third, by focusing on the negative exhortation, I safely hide behind the critic’s shaming attack of “You didn’t do THAT did you?” rather than the advisor’s defensive apology, “I’m sorry I suggested you do THAT and it didn’t work out. But hey! The theory was solid!”

This is all a lead-in before I poke my head out of my turtle shell to give positive advice about how you should invest, before I quickly return to my more comfortable space of how not to invest.

How to Invest

Are you ready for the most important, boring, good idea on how to invest?

You should invest via dollar-cost averaging in no-load, low-cost, diversified, 100 percent equity index mutual funds, and never sell. Ninety-five percent of you should do that, 95 percent of the time, with 95 percent of your investible assets.

Phew, I said it. That paragraph right there is a trillion dollar financial advisory industry sliced, diced, chopped, shredded, sautéed, and reduced to two sentences, and served on a beautiful platter for you. If you don’t understand all the words, don’t worry, just print them out, bring them to your financial advisor and demand only that. Every time he tries to deviate from that plan, just point back to those two sentences and say, “I want only this.”

You’re welcome.

How Not To Invest

Ok, now let me retreat to my more comfortable critic’s shell and tell you how – given that central piece of advice – you should NOT invest.

  1. You should not invest your money for less than 5 years. When I say ‘invest,’ I don’t mean buy some investment product with a view to selling it the next day, the next month, or even next year. I think five years is kind of the minimum investment horizon I’d endorse. Also, when investing, the best time horizon for selling is ‘never.’
  2. You should not invest in ‘safe’ products, like money markets and bank CDs, annuities and bonds. Since this contradicts most of what the banking and financial industry advocates, perhaps I should clarify this point. Money markets and banks CDs work wonderfully for saving money – to buy a fancy new pantsuit or a personal robot, for example, or some other essential purchase. Unfortunately, saving money offers almost no return on your money, and often a negative real return after taking into account taxes and inflation. Saving money is not the same as investing money. Annuities and bonds offer a wonderful psychological feeling of comfort. But that comfortable feeling is also not the same thing as investing. Parking money – when you can’t afford to lose any principal – is different from investing money. Investing money always involves the possibility of loss. Incidentally, I know your investment account is currently allocated to 60 percent stocks and 40 percent bonds (because everybody’s is.) I’m not your investment advisor, you’re not paying me one way or the other, so I don’t really care, but I’ll just point out that 40 percent of your investment account is poorly allocated.
  1. You should not invest in funds without checking the cost of the fund. Most of us would not dream of buying an ice cream sandwich at the Dollar Store without verifying its price first. I mean, I’ll take it out of the freezer and bring it to the cashier without knowing the price (maybe!) but I’m not too ashamed to ask ‘Hey, by the way, how much is this thing?’ (Although admittedly there are some things I wouldn’t do for a Klondike bar.) Can we have a show of hands from mutual fund investors who know the cost of the funds they bought? In my anecdotal experience, not even one in three investors knows the management fees of their funds. People who have worked in the finance industry usually know enough to ask, but even there I don’t think even one in two bothers to check ahead of time. FYI, it’s costing you a lot more than the price of an ice cream sandwich.
  1. Speaking of upfront payments, there is absolutely no reason to pay upfront fees for a fund, known as the fund’s ‘sales load.’ No reason at all. Do not do this. Oh, you didn’t know how much you’re paying in ‘sales load?’ See rule number 3.
  2. Don’t time the market. If you have investible assets ready to go right now into the market, just put them in the market, and forget what I wrote above about dollar-cost averaging. If, instead, you invest based on your monthly surplus, just set up autopilot investing from your paycheck or bank account and never alter that based on ‘timing’ concerns. There’s never a good time or bad time to be in the market. I mean, obviously there is, but there’s absolutely no reliable way you’ll know it ahead of time.1 Every academic study ever done concludes the same way: Timing is a mug’s game. You can’t win that way.
  3. If you’re not a financial professional, try not to spend too much time, energy, or brain space on this investing task. Simplicity and modesty can actually put you way ahead of the pros trying to do fancy things with their investment portfolios. Most of the exotic products don’t work better than the simple products, but they do tend to cost more, and they tend to go wrong in unexpected ways, at the most inopportune times. Keep it simple, smarty.


So that’s about it. If that all doesn’t work out for you, I’m sorry. But hey! The theory was solid.

A version of this appeared in the San Antonio Express News



Post read (5857) times.

  1. Well, the best time to be in the market is always thirty years ago. But you can’t get there from here unless you start today.

19 Replies to “How To Invest”

    1. Hi Bill – Thanks for your question. Most of the time, ETFs should work just as well as a mutual fund. The primary advantage of ETFs over mutual funds is that they can be traded intra-day, rather than once-a-day like mutual funds. Since the right holding period for investing is somewhere between 5 years and forever, that advantage of ETFs is irrelevant, from my perspective. As long as the investor isn’t tempted to trade intra-day, however, an ETF can serve the same function as a mutual fund just as well. The other two concerns for an ETF are costs and liquidity, both of which should be fine when it comes to comparing an index ETF to an index mutual fund. ETFs can be (and should be) just as cheap as an index mutual fund. In any case one should always be willing to ask/find out “how much does this cost?” for comparison purposes. Finally, some badly-constructed ETFs could be less liquid than a mutual fund, but if you stick to broadly diversified index ETFs that should not be a problem.

  1. I own about 20 stocks rather than an index fund. I’m relatively well diversified and do not sell, or trade perhaps a 2-4 times a year, so my expenses are typically $16-$32 per year. Over 10 years (or more), I’m a couple percent better than the S&P500, and a whole lot lower cost than an index fund. Is there a flaw in my approach?

    1. Your approach seems great, in so far as it’s diversified, low cost, 100% equities, and you don’t sell.
      There’s no need in your case to sign up for index funds.
      Many people are scared of individual stock-picking, and then once they build up enough confidence to buy stocks, quickly tip into the error of trading too much, thinking about it too much, second-guessing themselves, selling when they should be holding, trading when they should be holding, incurring trading and tax costs, and generally spending too much time thinking about investing and getting stressed out.
      If you can follow your plan without making those errors, then there’s no need to go with my simplified version. My general view is that if one enjoys gambling (I do, a little bit) then its worth allocating 5% of your money to the gambling activity of picking individual stocks. But if you can manage to do the actual ‘investing’ thing with 20 individual stocks with a ‘5 year to forever’ time horizon, then all the better!

  2. Could you elaborate on the first sentence of #5?

    For someone who is now sitting on a lump sum… is it worth it to invest the whole lump sum at once (and run the risk of having invested at the peak) – or does it make sense to create a dollar-cost averaging investing plan over, say, 5 years, whereby the lump sum would get progressively depleted as it gets invested in small chunks, month after month?

    I remember seeing back-testing research (from Vanguard?) saying that, on average, a single lump-sum investment would have outperformed a dollar-cost-averaging plan. But maybe the authors were biased, and then there is still the risk/fear of indeed investing it all at the peak.

    1. Great question! Equity markets go up ahead more often than they go down, (more days up than down, more months up than down, more years up than down, etc) so on a probability-weighted basis I think you’re always better off investing all of it now. I think the true probability-adjusted risk of all-at-once investing is psychological. Meaning, we could have plenty of buyer’s regret in retrospect once the market crashes on us. Ex-ante (or ‘a priori,’ or whatever other Latin words we can think of to represent the more straightforward phrase “ahead of time”) we have no way of knowing that the market will crash in any given time period. (We might have a ‘feeling’ one way or the other about an imminent market crash, but I don’t trust in that kind of ‘feeling’ as an accurate guide.) So, in sum, I think the smart-money odds-maker would say invest it all at once. It’s reasonable to decide instead to avoid the excessive pain of buyer’s remorse when the market crashes, so you could spread your purchases out into smaller chunks. But understand that when you buy in chunks you’re really mitigating psychological risk, not market risk.

  3. Well said, and I agree – it’s about mitigating psychological risk, not market risk. And in some cases, the former may be more important indeed.

    Here’s the research I was referring to:

    We conclude that […] the prudent action is investing the lump sum immediately to gain exposure to the markets as soon as possible. But if the investor is primarily concerned with minimizing downside risk and potential feelings of regret (resulting from lump-sum investing immediately before a market downturn), then DCA may be of use. Of course, any emotionally based concerns should be weighed carefully against both (1) the lower expected long-run returns of cash compared with stocks and bonds, and (2) the fact that delaying investment is itself a form of market-timing, something few investors succeed at.

  4. Life is too short to read drivel.
    I am attracted to wisdom.
    You write in a wise, pithy and logical way.

    1. Yes. Given the following conditions: 1. Time horizon >5 years. 2. Investment is diversified (20+ stocks or a diversified mutual fund) 3. The person can withstand downturns and won’t sell when the market goes down.
      Alternatively, a single retired person could decide that growing one’s wealth is not that meaniningful (because no heirs to pass $ on to) so a better idea would be to spend and enjoy the money. That’s also a great choice. But, if the point is to invest and grow the money, then yes 100% stocks is the way to do that.

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I founded Bankers Anonymous because, as a recovering banker, I believe that the gap between the financial world as I know it and the public discourse about finance is more than just a problem for a family trying to balance their checkbook, or politicians trying to score points over next year’s budget – it is a weakness of our civil society. For reals. It’s also really fun for me.

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