10 Important Things to Get Right With Investing

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Beyond Buy-and-Hold #34

I promote myself as the most severe critic of Buy-and-Hold Investing alive on Planet Earth today. Please don’t think that it follows that I am not grateful for the many important things that the Buy-and-Holders got right.

Set forth below is a list of ten powerful insights brought to us by the smart and good and hardworking people who developed the Buy-and-Hold concept:

1. It’s the Long-Term That Matters

It is human nature to focus on the short-term. This never works in stock investing. Good strategies often produce poor results for a time and poor strategies often produce good results for a time. To be successful, you must be willing to stick with a strategy long enough for it to pay off.

2. Keeping Costs Low Makes a Big Difference

Too many investors spend their energies fussing and fretting over things they cannot control. That’s a waste. You control how many transactions you enter. So you have a means available to you to limit your investing costs. Gaining a small edge makes a big difference in the long run because of the compounding effect.

3. Indexing Is the Best Choice for Most Middle-Class Investors

Most of us don’t have available to us the time needed to do the research required to pick stocks effectively. Indexing lets us tap into the benefits of stock investing in a simple and easy way.

4. We All Need to Be Invested in Stocks

The returns on stocks are too good to pass up.

5. Research-Based Strategies Are Best

Discussions of stock investing not rooted in what we have learned from academic research go around and around in circles. The human mind can rationalize just about anything. Research gives us something objective to turn to for effective responses to sales talk that appeals to our emotions.

6. The Historical Stock-Return Data Offers Solid Guidance

Lots of strategies can be presented in ways that make them sound good. Have they worked in the real world? What do the numbers say?

7. Tune Out the Noise

Most investing advice is actually harmful. The best advice is simple, straightforward, commonsense advice. What makes investing difficult is the need to remain removed from the influence of all the junk that will distract you and pull you in the wrong direction.

8. Keep it Simple

90 percent of what the media generates doesn’t matter. And it will confuse you if you pay attention to it.

9. The Average Market Return Is Plenty Good Enough

The average long-term return in the United States is 6.5 percent real. That’s good enough to finance a solid middle-class retirement plan. Approaches that promise returns higher than that for people who are not spending a good bit of time on investing can fairly be characterized as too good to be true.

10. Short-Term Timing Doesn’t Work

Stock returns follow a random walk in the short term. So trying to guess in which direction they are headed is almost surely going to hurt you.

Rob Bennett does not believes that stock prices are a retirement risks. Rob’s bio is here.

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10 Responses to 10 Important Things to Get Right With Investing

  1. Thank you for another informative article Rob. There are 9 truths here every investor should pay attention to. I have to take issue with #3. Using Indexing is problematic because 1) it only works in bull markets 2) indexes become overweighted with stocks that have already increased and underweighted in stocks that may have good value 3) indicies don’t own the best stocks.
    Investing in index funds just means the investor does not want to take the time to properly research good investments or does not take the time to get the help they need to put together a quality asset allocated portfolio. My Blog is dedicated to helping investors do just that.

    Thanks again for spreading the word of the dangers of buy and hold!

  2. Thanks for your kind words, Ken.

    Please understand that I am not one of those indexers who says that stock picking doesn’t work. I believe that stock picking does work for those with the skills needed to pull it off. I don’t think that’s most of us, though. I believe that the typical middle-class investor is better off in indexes. Some people love investing so much that they are willing to spend the time and brainpower, but many others do not.

    I certainly recommend that those seeking to learn how to pick stocks effectively take a look at your site. I’ve seen lots of smart stuff coming forward at Twitter with your name on it.

    Rob

  3. I think Ken has touched on something substantial here, something conveniently ignored by most investment experts (are there any?).

    “Using Indexing is problematic because 1) it only works in bull markets”–this is one of those self-evident truths that gets brushed under the investment rug. Indexing guarantees a trip to the bottom in a market slide or crash, because there are no counter positions. That isn’t to say that any group of stocks will fully resist a crash, but some are more resistant than others.

    A fund loaded up with the stocks comprising the index can do no better than track the market. I fully agree with Rob, index funds are the place to be in a bull run, but in sideways markets or decling ones, valuation is the better course.

    The problem, I think, is that simple, effective methods, like index funds in a bull market, tend to become entrenched and people stick with them even when the game changes. They’re not “all-weather funds”, and that’s what gets ignored.

  4. I agree that index funds are more dangerous than individual stocks in a secular bear market.

    When you buy an index fund, you are insuring yourself that you will obtain the market return. That’s a good thing when the market return is likely to be good. It’s a bad thing when the market return is likely to be poor. Stock pickers can escape the effects of a bear through good stock picking. Indexers have nowhere to escape.

    It’s irresponsible to advise people to invest in index funds without also telling them that they need to lower their stock allocations when prices get too high.

    There are alternatives to Buy-and-Hold indexing for those who don’t want to learn how to pick stocks. My favorite alternative is just to invest for a time in risk-free asset classes like IBonds and TIPS and CDs. That insures that you will be able to hold on to your money until index funds again offer a reasonable chance of providing good long-term returns.

    Rob

  5. Hi!
    Rob, do you mean “middle class” or just the average investor? I think you mean the average investor, not middle class. (we’re talking about how sophisticated an investor is here right, not if they are middle or upper class?)

    Kevin, I see your point that supports Ken’s argument – that index funds aren’t good for choppy or down markets and only good for bull markets – but the average investor doesn’t know how to short stocks. In fact, even sophisticated investors who are good at buying stocks, long, don’t necessarily know what they’re doing on the short side.

    Meaning, just because someone is good at buying stocks doesn’t mean they’re good at shorting them, it’s a completely different skill set, and the reason why a lot of seasoned fund managers actually use ETF’s to get short exposure instead of shorting individual stocks. Plus, shorting stocks is way more risky than buying stocks, because the loss is unlimited. I’d argue that very few people should be shorting stocks. As for me, I’m an indexer, obviously.

    But I see your point in that index funds aren’t all weather funds, totally agree. People need to understand that they’re taking the good and the bad with indexing, ie no alpha. thanks!

  6. Hi Kathryn – I wasn’t actually hinting at shorting stocks–I wouldn’t do that myself. On the downside I was thinking more in terms of getting out of the market completely. Nothing fancy with that, even the least sophisticated investor can do it. And it’s consistent with the first rule of investing–don’t lose money!

  7. Rob, do you mean “middle class” or just the average investor? I think you mean the average investor, not middle class. (we’re talking about how sophisticated an investor is here right, not if they are middle or upper class?)

    Thanks much for stopping by, Kathyrn.

    I understand your question. I use that “middle-class” phrase all the time in everything I write. There’s a logical sense in which you are correct. The advice applies to wealthy investors as well as to middle-class investors.

    But here’s the thing: I do not care about wealthy investors!
    m
    I have nothing against them as people. I have met many kind and giving and smart rich people. I love rich people. But I do not write for them. If they read my stuff, I am grateful. But it is not rich people that I have in mind when I think about investing and organize my thoughts and craft my sentences.

    A word that people often use to characterize my writing is “passionate.” To the extent there really is passion there, it is there because, when I write, I have a reader in mind who I am writing to. That reader is a middle-class person. He’s not poor because poor people generally cannot benefit from the money strategies I write about (I love poor people too, of course — I just do not write for them). And he’s not rich because I’m not worried so much about what happens to the money of the rich (as much as I love them regardless).

    Say that a person with $3 million in assets suffers a 50 percent loss from doing dumb stuff with his money. He’s still got $1.5 million. He’s upset. But he’s not busted. He still goes to the beach that year.

    Now say that a person with $300,000 in assets suffers a 50 percent loss. That may mean that his or her son or daughter does not get to go to college. He or she may well not go to the beach that year because of the fear he feels over what has happened. This is a very different situation.

    I had zero interest in personal finance until I lost a job I loved at age 35. All of the work I have done in the saving and investing fields followed from that experience. I hated the feeing of financial vulnerability. I have made it my life’s work to help other middle-class people never experience those feelings. The full truth is that I have come to believe that God put me on earth to do this work (as crazy and scary as that sounds).

    Anyway, I love rich people. I wish them all the best in all their life endeavors. I am happy if any of them care to read my stuff. I love the idea of talking things over with them and kidding around with them and all this sort of thing. But the people I am thinking of when I write my words are middle-class people. It is their money worries and hopes that drive me. I am happy to have anyone benefit from the advice. But my intent is to help middle-class people. That’s where my heart is. And every word that I write starts in the heart. I’m not one of these people who strives to be a purely rational being. Not this boy!

    I was born in Northeast Philadelphia. That’s where all this is coming from. The people who live there call it The Great Northeast. No outsider has ever been able to figure out why we call it that. But we still do call it that all the same. You can take the boy out of Northeast Philadelphia but you cannot take the Northeast Philadelphia out of the boy!

    Rob

  8. This is a sophomoric and dilute synopsis that uses some truth extrapolated to validating the investment strategy of buy and hold. How did your buy and hold work in 2002, 2003 and in 2007, 2008, for example. Did the commission you saved by not taking profits and the relatively little tax you would have paid if you just did that make up for 40 and 50% capital losses many suffered?This article is mostly innaccurate and not at all the mindset of consistently profitable market traders.

  9. Hi Wil–If you look at the long series of posts Rob has written, he’s actually been warning consistently of the dangers of buy-and-hold for the precise reasons you’ve indicated. Valuations and long term timing can never be ignored, and that’s essentially what happens in buy-and-hold.

    In the comments of this post, we’ve gotten off on a side track of indexing. Rob says (and I agree) that indexing is the best route for most investors, who don’t have the time to investigate individual stocks in any depth. But he’s also argued against the practice of holding through bear markets. His position has been to reduce exposure during big run ups, and buy in after large declines. Index funds are a good way to accomplish this because they track the market and you don’t have to worry about stock selection–only timing.

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