“October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August, and February.” – Mark Twain.
I have some advice that might upset you. If you want to be a better investor:
- Stop trading stocks on your iPhone and turn off CNBC.
- Buy a few low-cost mutual funds that track the overall market. If you must buy stocks, listen to Warren Buffet: “Only buy something that you’d be perfectly happy to hold if the market shut down for ten years.”
- Put money in religiously, whether the market’s up or down.
- Diversify for your age and investment goals.
- Then rebalance annually.
THE ADVICE THAT NOBODY’S GIVING
This advice is simple. It’s easy-to-follow. And it’s effective. If you invest this way, in 20 or 30 years you’ll have better returns than your friends who will have spent weeks of their lives combing through boundless torrents of data in futile attempts to beat the market.
Why don’t hear this advice more often? Because nobody makes money giving it.
If magazines advised it, they couldn’t sell issues with headlines like 10 Hot Stocks to Buy Today!
If financial advisors advised it, they couldn’t peddle actively-managed mutual funds with 2.0% expense ratios (meaning big paydays for the advisor and fund manager and returns that are certainly not certain to beat the market).
Don’t want to take my word for it? That’s OK. I’ve got some backup…
THE ONLY INVESTING BOOK YOU’LL EVER NEED
The recent book The Investment Answer is the work of two successful money managers, Gordon Murray and Dan Goldie, CFA, CFP. The book was featured in a Nov. 2010 New York Times article, “A Dying Banker’s Last Instructions”. (Mr. Murray wrote the book following a diagnosis of glioblastoma, an aggressive brain cancer; he died January 20.)
A mere 78 pages long, I read the The Investment Answer while stirring dinner and rocking my six-month old daughter to sleep. In that brief time, I came to two conclusions:
- Everybody should read this book.
- Most people may never have to read another investing book.
That said, I’ll warn you—you won’t learn much more than I just told you. (You’ll just hear it from two guys slightly more qualified than me.) But hopefully, you’ll put the book down knowing with absolute confidence that the BEST way to invest is also the EASIEST way.
WHY SIMPLE INVESTING WORKS
We’re not computers, we’re human. However intelligent we are and rational we try to be, eventually, our emotions get the best of us. Here’s an example from The Investment Answer:
…[O]ur own natural instincts can be our own worst enemy when it comes to investing. This is illustrated in an annual study conducted by Dalbar, a leading financial services market research firm that investigates how mutual fund investors’ behavior affects the returns they actually earn. Figure 1-1 sows data from the most recent Dalbar study covering the 20-year period ending in 2009:
The average stock fund investor earned a paltry 3.2 percent annually versus 8.2 percent for the S&P 500 Index.
The average bond fund investor earned only 1.0 percent annually versus the Barclays U.S. Aggregate Bond Index return of 7.0 percent, and
What is perhaps most remarkable and unfortunate is that the average stock fund investor barely beat inflation, and the average bond fund investor barely grew his money at all.
Average Investor vs. Markets
To be a successful investor, you must remove human behavior. The way to do that is to:
- Stop YOURSELF from buying and selling different investments and
- Invest in FUNDS that aren’t constantly trading, either.
Want MORE examples of how behavior gets in the way of successful investing? Check out Carl Richards’ The Behavior Gap. Richards draws weekly sketches for the NYTimes.com depicting how our human behavior interferes with rational financial decision making. His entire gig started with this one simple sketch:
©Carl Richards/The Behavior Gap.
What do you think? Are you a buy-and-hold investor? Do you disagree? Can a savvy investor or fund manager beat the market in the long run? Share your thoughts.