If you go to the grocery store hungry, you will likely make bad decisions. Likewise, if you make financial decisions in moments of high-emotion you will likely mess up.
Money is lost in moments of stress and impulses, money is made when you adhere to a solid strategy.
The investment policy statemet
The advice of Jack Bogle's followers (who call themselves Bogleheads):
- Develop a workable plan
- Invest early and often
- Never bear too much or too little risk
- Never try to time the market
- Use index funds when possible
- Keep costs low
- Diversify
- Minimize taxes
- Keep it simple
- Stay the course
I highly recommend reading the Bogleheads investment philosophy.
One of their tennets is to write an investment policy statement (IPS), which is a document you write for yourself in which you detail how you will invest. Whenever faced with an investment decision, you grab your IPS and look back at the decisions you made when you were in a rational state of mind.
I recommend reading the Boglehead IPS instructions.
Standing on the shoulders of giants
Do I have the perfect investment strategy? No. But I love listening to people smarter than me. Most people in the financial world that I really respect give very similar advice. I've listed my two favourites below based on complexity.
Level 1: The Buffett
Warren Buffett is one of the most intelligent and generous individuals I have had the pleasure of reading. He made a bet in 2007 that 'the market' (see my article on assets) would outperform money managers.
To quote Fortune:
In 2007, Warren Buffett bet a million dollars that an index fund would outperform a collection of hedge funds over the course of 10 years. This week he won that bet, but the big winner in the wager is a charity called Girls Inc.
In essence he said you are better off not letting another human making decisions about your money, and to just put your money in an index fund.
More specifically Buffett wrote (in a shareholder letter):
My advice to the trustee could not be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard’s.) I believe the trust’s long-term results from this policy will be superior to those attained by most investors – whether pension funds, institutions or individuals – who employ high-fee managers.
So there you have it, Buffet says:
- 10% in bonds
- 90% in stocks (in the form of low-cost index fund)
Level 2: The Dalio
Ray Dalio is as intelligent and generous as Warren Buffett, but where Buffett looks at individual stocks Dalio's job is to look as the macroeconomic world.
Dalio created the 'all weather portfolio', based on something called 'risk parity' (quote from Money: Master the game):
When you look at most portfolios, they have a very strong bias to do well in good times and bad in bad times
Dalio divided the macro-economic world into four seasons:
| Economic Growth | Inflation |
|---|---|
| Up | Up |
| Down | Up |
| Up | Down |
| Down | Down |
He then looked at assets that do well in those seasons and weigh them. The result?
The strategy he shares ... has produced just under 10% annually and made money more than 85% of the time in the last 30 years (between 1984 and 2013)
The different 'seasons' and how Dalio handles them buffer this portfolio is designed to mitigate risk:
when the market was down 37% in 2008 his portfolio model was down only 3.93%
What does this portfolio look like?
- 30% Stocks
- 40% Long-Term Bonds
- 15% Intermediate-Term Bonds
- 7.5% Gold
- 7.5% Commodities
Level 42: The Graham
Benjamin Graham was the mentor of Warren Buffett. He wrote a book called the intelligent investor, which details a process known as value investing. The idea behind this approach is to find great companies, and buy them at fair prices.
The reason this is not 'level 3' but rather 'level 42' is that it is orders of magnitudes more complex to do. Hypothetically you could get greater returns than level 1 and 2, but the risk of losing everything is far higher.
Let me put it this way, I didn't put this option in here because I recommend it, but because you need to know it exists. But in my mind you do not have the right to practice this technique until you realise how little you know.
I had my moment a few years back, after I finished reading 'the intelligent investor'. My three conclusions were:
- This is really cool and I see how it could work
- Doing this is a full time job, and even then it would take me years to learn to do it well
- I need to do much much more research before I earn the right to pick stocks and put serious money in them
Don't play with stocks. They are like fire. Great if you're a competent adult, but not if you are still in your infancy.
But Mentor, you are a risk-loving crypto guy?!
Yes I made money in crypto, but I was a young little fool in the right place at the right time. Sure, I made the decision to invest in Bitcoin in 2013 and later joined the Ethereum crowdsale with what little money I had. But the real value from that experience was not the money, it was the lessons.
Lessons like 'buy low sell high' are a visceral reality for me. Many times have I hovered at the brink of panic-selling, and I'm not sure how I managed to sell any of my assets when they kept going up.
If anything, my adventures in crypto are the reason less than 10% of my money is in that market.
Crypto gave me the oportunity to experience what bubbles are like, and what they do to your mind. It was like driving a car around a corner too fast, on the one hand it's exciting, on the other it should scare the living hell out of you how close to death you are. It certainly scared me, and I will call that a little sliver of wisdom earned.