10 rules of investing

Archived From: Finance
  • Go to page :
  • 1 2
  • Text Only
Voting History
rated:
This is from John Bogle (founder of Vanguard) and thought it was worth a share.

1. Remember reversion to the mean. What's hot today isn't likely to be hot tomorrow. The stock market reverts to fundamental returns over the long run. Don't follow the herd.

2. Time is your friend, impulse is your enemy. Take advantage of compound interest and don't be captivated by the siren song of the market. That only seduces you into buying after stocks have soared and selling after they plunge.

3. Buy right and hold tight. Once you set your asset allocation, stick to it no matter how greedy or scared you become.

4. Have realistic expectations. You are unlikely to get rich quickly. Bogle thinks a 7.5 percent annual return for stocks and a 3.5 percent annual return for bonds is reasonable in the long-run.

5. Forget the needle, buy the haystack. Buy the whole market and you can eliminate stock risk, style risk, and manager risk. Your odds of finding the next Apple (AAPL) are low.

6. Minimize the "croupier's" take. Beating the stock market and the casino are both zero-sum games, before costs. You get what you don't pay for.

7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it. And a money market may be the ultimate risk because it will likely lag inflation.

8. Beware of fighting the last war. What worked in the recent past is not likely to work going forward. Investments that worked well in the first market plunge of the century failed miserably in the second plunge.

9. Hedgehog beats the fox. Foxes represent the financial institutions that charge far too much for their artful, complicated advice. The hedgehog, which when threatened simply curls up into an impregnable spiny ball, represents the index fund with its "price-less" concept.

10. Stay the course. The secret to investing is there is no secret. When you own the entire stock market through a broad stock index fund with an appropriate allocation to an all bond-market index fund, you have the optimal investment strategy. Discipline is best summed up by staying the course.

Member Summary
Most Recent Posts
very nice!

wca53 (Jan. 09, 2013 @ 5:25p) |

Rule 8: What worked in the recent past is not likely to work going forward.

daveymark (Jan. 09, 2013 @ 5:53p) |

Did you take your own advice?

The hedge funds are out of Apple and they're not coming back. Anyone who thought like you ... (more)

elBulli (Jan. 10, 2013 @ 1:30p) |

Thanks for visiting FatWallet.com. Join for free to remove this ad.

This should be stickied with "READ THIS FIRST BEFORE POSTING ABOUT WHERE TO INVEST" as the title.

11. Goat butts against a hedge and its horns become entangled.

Thanks OP

11. Market timing works sometimes.

12. Mutual funds want you to stick it out because they lose their fee if you leave their vehicle.

13. Everyone talks about how great the index is after it bounces back. But the timing of when you invest and when you need the money is largely just luck.

germanpope said:   11. Market timing works sometimes.

12. Mutual funds want you to stick it out because they lose their fee if you leave their vehicle.

13. Everyone talks about how great the index is after it bounces back. But the timing of when you invest and when you need the money is largely just luck.

13: I thought the odds favored people being in the market at any time because 2 out of 3 trading days were positive rather than negative.

14. Indexes are constructed by market value: the most overvalued elements get more weighting. They will revert downwards someday. You pay someone else to do it for you in a fund. These expenses eat away returns. 2 reasons why indexers will never get rich.

No reason to find the next Apple. AAPL is just warming up...we will see $1,000 per share by next year. Invest AAPL for the long term since there is no another AAPL right now.

The only problem with these rules is they assume the future = the past.

Excellent list OP. I agree with another poster that this should be a sticky.

SFcapitalist said:   7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it.
You are correct. There is no free lunch. You'll find most of the ones making claims to the contrary are ignorant to risk or don't know how to calculate it.

snork615 said:   14. Indexes are constructed by market value: the most overvalued elements get more weighting. They will revert downwards someday. You pay someone else to do it for you in a fund. These expenses eat away returns. 2 reasons why indexers will never get rich.

They also won't go broke. Go swing for the stands and lets see what your batting average is...

Good advice. Let me add one more:

100. Pay attention to index fund expense ratios.

snork615 said:   14. Indexes are constructed by market value: the most overvalued elements get more weighting. They will revert downwards someday. You pay someone else to do it for you in a fund. These expenses eat away returns. 2 reasons why indexers will never get rich.
What about small cap indices?

nycll said:   snork615 said:   14. Indexes are constructed by market value: the most overvalued elements get more weighting. They will revert downwards someday. You pay someone else to do it for you in a fund. These expenses eat away returns. 2 reasons why indexers will never get rich.
What about small cap indices?


I think he is talking about this --->

equal weight description

small or large cap isn't the issue

BetterDays said:   Excellent list OP. I agree with another poster that this should be a sticky.

SFcapitalist said:   7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it.
You are correct. There is no free lunch. You'll find most of the ones making claims to the contrary are ignorant to risk or don't know how to calculate it.


I disagree with number 7. For the average investor, there is no high return without risk. However, for those with superior skill, excess returns are possible.

Those with excess returns always claim superior skill - until one day the excess returns stop...

steve1jr said:   Those with excess returns always claim superior skill - until one day the excess returns stop...

Everyone doesn't have to return to the mean --- someone could make a killing and park most of it in CDs

That money won't ever go back to the mean

BetterDays said:   Excellent list OP. I agree with another poster that this should be a sticky.

SFcapitalist said:   7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it.
You are correct. There is no free lunch. You'll find most of the ones making claims to the contrary are ignorant to risk or don't know how to calculate it.


But research shows that in many asset classes, excessive risk is not rewarded with any increased return. That means that there are lower risk products with the same return, that are superior in every way. Don't think that because an asset class is risky, it can provide higher average returns.

"Bro you should totally buy stock market index funds."

-dude selling stock market index funds

JohnGalt69 said:   BetterDays said:   Excellent list OP. I agree with another poster that this should be a sticky.

SFcapitalist said:   7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it.
You are correct. There is no free lunch. You'll find most of the ones making claims to the contrary are ignorant to risk or don't know how to calculate it.


But research shows that in many asset classes, excessive risk is not rewarded with any increased return. That means that there are lower risk products with the same return, that are superior in every way. Don't think that because an asset class is risky, it can provide higher average returns.



to me, high risk means you can lose a lot of money

and if you lose a lot of money, you definitely are not going to get a high return out of the thing that crashed

I understand I could put together a portfolio with higher and lower risk investments --- but I don't think there is any calculation of risk that is going to be perfect --- nor is there going to be any perfect way to determine the correlation of one asset to another

it still comes down to an educated crap shoot from an investment stand point

Crazytree said:   11. Goat butts against a hedge and its horns become entangled.
Green for saying "goat butts"

RedCelicaGT said:   Crazytree said:   11. Goat butts against a hedge and its horns become entangled.
Green for saying "goat butts"
I have been trying to work in a "six demon bag" reference here for some time.

tolamapS said:   BetterDays said:   Excellent list OP. I agree with another poster that this should be a sticky.

SFcapitalist said:   7. There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it.
You are correct. There is no free lunch. You'll find most of the ones making claims to the contrary are ignorant to risk or don't know how to calculate it.


I disagree with number 7. For the average investor, there is no high return without risk. However, for those with superior skill, excess returns are possible.


5% risk free seems pretty high to me especially seeing what the S&P has done over the last 10 years. I have done exactly what is said can't be done. Escaped risk and capture 5% return risk free.

List is so flawed and biased it isn't funny, but most here won't see that so to each his own.

4, 5, 6, 7, 9, and 10 are all flawed and examples can be shown to contradict the statements. Doesn't mean that any example will disprove the statement, but that it can be done which means if you wrote the opposite you could show examples of it being true and examples that would contradict that statement. There are very few absolutes and 4,5,6,7,9, and 10 are not absolutes.

If you are interested in investing in index funds this list is a great reason why you would do so on a macro level. However I could head over to the Individual Stock Discussion thread and see how many of these statements are factually incorrect as related to some of those posters who have been investing in stocks long term.

Bogle is great! I wish I had invested in Home Depot. I wish I had invested in Google. I wish I had invested in Facebook---not. Exceptions of the windfalls are out there. I bet there are more exceptions of the life savings lost due to looking for the next "google" or some other high flyer but no one is bragging about those. For me and my money, Bogle is the way to go!! Thanks OP.

mikef07 said:   
5% risk free seems pretty high to me especially seeing what the S&P has done over the last 10 years. I have done exactly what is said can't be done. Escaped risk and capture 5% return risk free.


Are you getting the 5% return from CD?

unnamedone said:   mikef07 said:   
5% risk free seems pretty high to me especially seeing what the S&P has done over the last 10 years. I have done exactly what is said can't be done. Escaped risk and capture 5% return risk free.


Are you getting the 5% return from CD?


Just a guess, but he might be referring to one of PENFED's CD's


Statement
Disclaimer
unnamedone said:   mikef07 said:   
5% risk free seems pretty high to me especially seeing what the S&P has done over the last 10 years. I have done exactly what is said can't be done. Escaped risk and capture 5% return risk free.


Are you getting the 5% return from CD?


Savings account. FDIC insured. THe point is that these are macro statements and what is available to individuals varies per the individual. I surely do not have access to hedge funds, etc, but to say that no hedge funds have ever beaten (or could beat) the market (at similar risk levels) is absurd. our very own Individual stock thread shows that.

Doesn't mean the list is irrelevant and if someone wants to know why others invest in index funds point to this list on a macro level, but as usual the indexers act as if this is the only way and is unbeatable when some of these very posters can't even figure out a Sharpe ratio calculation. I do like 1,2,3, and 8 though.

I don't claim to have an special analytical skills --- but I can say that a Sharpe ratio is just another backward looking tool that still leads to making an educated guess as to where to put your money today

the guru of the 80s could be different from the guru of the 90s and the guru of the last six weeks

so the index guys do have a good argument that the index is better than opening up the phone book and finding a guru

but they certainly cannot say that no one beats the index consistently, because there are those that do

larrymoencurly said:   germanpope said:   11. Market timing works sometimes.

12. Mutual funds want you to stick it out because they lose their fee if you leave their vehicle.

13. Everyone talks about how great the index is after it bounces back. But the timing of when you invest and when you need the money is largely just luck.

13: I thought the odds favored people being in the market at any time because 2 out of 3 trading days were positive rather than negative.



I am not sure what time frame is being used for the 2 out of 3 trading days, but that statistic would certainly be vastly different in different time periods

mikef07 said:   
Savings account. FDIC insured. THe point is that these are macro statements and what is available to individuals varies per the individual. I surely do not have access to hedge funds, etc, but to say that no hedge funds have ever beaten (or could beat) the market (at similar risk levels) is absurd. our very own Individual stock thread shows that.

Doesn't mean the list is irrelevant and if someone wants to know why others invest in index funds point to this list on a macro level, but as usual the indexers act as if this is the only way and is unbeatable when some of these very posters can't even figure out a Sharpe ratio calculation. I do like 1,2,3, and 8 though.


I don't see how a subsidized FDIC insured savings account you have access to that returns 5% means much as far as investment advise.

Is your point that everyone should make sure to take advantage of subsidized free money?

It's no doubt good advise but also a bit elementary, like maxing out employer match on a 401k. But perhaps in a USA where most households carry credit card balances they pay 10%+ APR on that kind of advise should be front and center.

germanpope said:   I don't claim to have an special analytical skills --- but I can say that a Sharpe ratio is just another backward looking tool that still leads to making an educated guess as to where to put your money today

the guru of the 80s could be different from the guru of the 90s and the guru of the last six weeks

so the index guys do have a good argument that the index is better than opening up the phone book and finding a guru

but they certainly cannot say that no one beats the index consistently, because there are those that do


Fair point and I have your statement is spot on, but one should still expect someone to be able to calculate a Sharpe ratio and make correct statements when comparing two funds.

powellm said:   mikef07 said:   
Savings account. FDIC insured. THe point is that these are macro statements and what is available to individuals varies per the individual. I surely do not have access to hedge funds, etc, but to say that no hedge funds have ever beaten (or could beat) the market (at similar risk levels) is absurd. our very own Individual stock thread shows that.

Doesn't mean the list is irrelevant and if someone wants to know why others invest in index funds point to this list on a macro level, but as usual the indexers act as if this is the only way and is unbeatable when some of these very posters can't even figure out a Sharpe ratio calculation. I do like 1,2,3, and 8 though.


I don't see how a subsidized FDIC insured savings account you have access to that returns 5% means much as far as investment advise.

Is your point that everyone should make sure to take advantage of subsidized free money?

It's no doubt good advise but also a bit elementary, like maxing out employer match on a 401k. But perhaps in a USA where most households carry credit card balances they pay 10%+ APR on that kind of advise should be front and center.


Not sure where you get the subsidized statement, but the point remains true. There are very few absolutes in investing and this list is a whole bunch of absolutes. As far as relevance goes the statement above was made that getting higher than expected returns risk free are not possible. This is the risk free portion of my portfolio. Someone else mentioned Penfed CDs. My assumption is that those are paying higher than normal %s which means they are also "high" risk free vehicles.

ETA: From above 7 - "There's no escaping risk. I've long searched for high returns without risk; despite the many claims that such investments exist, however, I haven't found it."

I just posted one.

germanpope said:   I don't claim to have an special analytical skills --- but I can say that a Sharpe ratio is just another backward looking tool that still leads to making an educated guess as to where to put your money today

the guru of the 80s could be different from the guru of the 90s and the guru of the last six weeks

so the index guys do have a good argument that the index is better than opening up the phone book and finding a guru

but they certainly cannot say that no one beats the index consistently, because there are those that do



Let's just say I'm 20 and going to retire at 65. 45 years of working/school and investing. Name one fund, money manager, that has beaten the market for that long. My point is that I don't want someone to beat the index for one or two years "consistently." I want them to beat it every year over time. We have seen that does not happen. Now, if you want to study the market and devote hours and hours every week to market timing, you may do well. Personally, I have a life to live.

jeffc said:   germanpope said:   I don't claim to have an special analytical skills --- but I can say that a Sharpe ratio is just another backward looking tool that still leads to making an educated guess as to where to put your money today

the guru of the 80s could be different from the guru of the 90s and the guru of the last six weeks

so the index guys do have a good argument that the index is better than opening up the phone book and finding a guru

but they certainly cannot say that no one beats the index consistently, because there are those that do



Let's just say I'm 20 and going to retire at 65. 45 years of working/school and investing. Name one fund, money manager, that has beaten the market for that long. My point is that I don't want someone to beat the index for one or two years "consistently." I want them to beat it every year over time. We have seen that does not happen. Now, if you want to study the market and devote hours and hours every week to market timing, you may do well. Personally, I have a life to live.


https://www.americanfunds.com/funds/details.htm?fundNumber=4

11.93% since 1934 after any and all max fees.

Stock market and or same allocation in stock market has not done that I do not believe.

Does that mean it will do it over the next 45? No one has a clue, but again it can be done. Does that mean it won't? No one knows that either.

Another one

https://www.americanfunds.com/funds/details.htm?fundGroupNumber=...

13.10% since 1973 after an and all max fees.

Does that mean it will do it over the next 45? No one has a clue, but again it can be done. Does that mean it won't? No one knows that either

If you have a philosophy that no it won't then you would not put money in here. IF you think it will then you might. Regardless it is all opinion going forward.

I think the #1 rule should be - Invest early, invest often, invest as much as you can and diversify. IF you do that you will be splitting hairs looking backwards between 8-12% had you done some other fund meaning you'll say "Oh man I could have gotten 10.8% instead of 10.4% (risk adjusted)." or something along those lines.

jeffc said:    ... Let's just say I'm 20 and going to retire at 65. 45 years of working/school and investing. Name one fund, money manager, that has beaten the market for that long. My point is that I don't want someone to beat the index for one or two years "consistently." I want them to beat it every year over time. We have seen that does not happen. Now, if you want to study the market and devote hours and hours every week to market timing, you may do well. Personally, I have a life to live.

I don't claim to be rich off investing or have any special skills. I can say that I outperformed the market over the past ten years because a lot of my money was going in after the 2001 crash and I was fortunate to be underweight during the 2008 crash. I also did some seasonal timing before 2008. This was largely luck and watching the headlines leading up to the Lehman event. There were a lot of people preaching index funds during the 2008 crash year. Fortunately I broke from that mold and had some dry powder for the rebound.

I am not rich off this and I realize this all largely guessing but I have lot more money than if just took a hands off approach.

Risk and expected rate of return are highly correlated.

BradMajors said:   Risk and expected rate of return are highly correlated.

risk and expected rate of loss are also highly correlated

germanpope said:   I don't claim to have an special analytical skills --- but I can say that a Sharpe ratio is just another backward looking tool that still leads to making an educated guess as to where to put your money today

the guru of the 80s could be different from the guru of the 90s and the guru of the last six weeks

so the index guys do have a good argument that the index is better than opening up the phone book and finding a guru

but they certainly cannot say that no one beats the index consistently, because there are those that do


The problem is that there is no method to figure out who will beat the index ahead of time. Since most gurus dont beat the index over the long haul, the return is typically better just using a low cost index method. If you know how to pick warren buffets ahead of time then you will be richer than warren buffet.

Rule #1: listen to Benjamin Graham

dhodson said:    ... The problem is that there is no method to figure out who will beat the index ahead of time. Since most gurus dont beat the index over the long haul, the return is typically better just using a low cost index method. If you know how to pick warren buffets ahead of time then you will be richer than warren buffet.

I am sure there people that are just consistently good traders while at the same time being good stock pickers.

This person might not be able to manage a billion at a rate they can manage their quarter or half million. But they might be consistently able to make a living on their small potatoes. And their living may be well above an index return.

Skipping 37 Messages...
docjoo said:   No reason to find the next Apple. AAPL is just warming up...we will see $1,000 per share by next year. Invest AAPL for the long term since there is no another AAPL right now.

Did you take your own advice?

The hedge funds are out of Apple and they're not coming back. Anyone who thought like you and bought at $700 isn't getting their money back for at least a year, if ever. This is assuming Apple doesn't come out with something else revolutionary like the iPhone/iPad. But chances are slim to none at this point with the new management at the helm. Looks like now all they can do is make things bigger (iPhone) or make them smaller (iPad) and throw in tech that everyone else has had for a while (LTE, for example).



Disclaimer: By providing links to other sites, FatWallet.com does not guarantee, approve or endorse the information or products available at these sites, nor does a link indicate any association with or endorsement by the linked site to FatWallet.com.

Thanks for visiting FatWallet.com. Join for free to remove this ad.

TRUSTe online privacy certification

While FatWallet makes every effort to post correct information, offers are subject to change without notice.
Some exclusions may apply based upon merchant policies.
© 1999-2014