During the course of a year, I read a lot on the topic of investing and personal finance. Articles, blogs, books, tweets, white papers, journal pieces, etc.
I read some good stuff (and I read, unfortunately, too much bad stuff). Below, I highlight four of the best investing tidbits that I came across in 2014.
One of the best pieces of advice I read—and you may have read it or read about it too, as it was well publicized—was Warren Buffett’s annual letter to Berkshire Hathaway shareholders. In the letter, Mr. Buffett, considered by many to be the world’s best investor, gave the world a peek into his will and, specifically, the investment instructions to a trustee for his wife’s benefit. In short, he suggests a 10% holding in short-term government bonds and 90% in a very low-cost, broad-based U.S. stock index fund. Mr. Buffett wrote: “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.”
I am certainly not endorsing any specific asset allocation here, but takeaways. First, have an estate plan, which may sound like a planning tool for the wealthy, but I can assure you it is not. I’m smart enough to know you need an estate plan, but not smart enough to give you additional guidance. I will defer to our resident estate planning expert, Alisa Shin.
Second, base your investment plan on low-cost vehicles. Cost is a factor you can control. The less you pay to invest, the more you keep.
I will go from Warren Buffett to the bulletin board of the Bogleheads, a group of passionate investors who espouse the low-cost, long-term, balanced, and diversified investment approach of their namesake, Vanguard founder John C. Bogle. I came across a question on the forum regarding the optimal way to deploy one’s invested assets. Here’s one of the responses, which I edited for clarity.
The general rule of thumb for investing priority is:
- Invest in your company 401(k) plan up to the match.
- Put the maximum allowable amount in a Roth IRA (if eligible).
- Put the maximum allowable amount in your company 401(k) plan.
- Invest the remainder in taxable accounts.
It’s a good list, but I checked in with my colleague Maria Bruno in Vanguard Investment Strategy Group, and she suggested adding the three items highlighted in red:
- Invest in your company 401(k) plan up to the match.
- Pay off short-term, non-tax-deductible debt (e.g., credit card, car loan).
- Establish an emergency fund; 6–12 months of living expenses is a good guidepost.
- Put the maximum allowable amount in a Roth IRA.
- Put the maximum allowable amount in your company 401(k) plan.
- Invest the remainder in taxable accounts.
- Pay down tax-deductible debt (e.g., home mortgage).
So far we have Mr. Buffett, the Bogleheads, Ms. Bruno. I’ll take a “B” please, Pat. Vanguard’s aforementioned founder dispensed some useful advice on Marketwatch.com to investors unsettled by the stock market’s autumn volatility. Mr. Bogle said: “One of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.”
Not much to elaborate on here. I will admit, however, I do tend to peek. The key is not to react, making ill-advised, emotionally driven moves. When I was a kid, my mother used to warn me when we went to crafty-type stores: “You can look, but don’t touch anything.” I keep that in mind when I log on to vanguard.com to check my balances.
My final nugget comes from blogger Larry Swedroe, principal of Buckingham Asset Management and cofounder of BAM Advisor Services. (Okay, perhaps I’m taking this “B” thing a bit too far.) Speaking on the topic of complex exchange-traded funds (ETFs) to USA Today, Mr. Swedroe said, “If you don’t understand an investment well enough to explain it to a fifth-grader, don’t buy it.”
I agree with the premise, but I’m not sure about the fifth-grader part. I can imagine trying to explain indexing to an 11-year-old.
Me: Indexing is very simple. You buy the 3,784 stocks in the entire stock market and hold them.
11-year-old: How can you afford to buy all of those stocks? Wouldn’t you need a gazillion dollars?
Me: With indexing, you are essentially buying a market average, but you’ll do better than average over time.
11-year-old: That doesn’t make any sense.
Me: Index funds are very cheap to buy compared to other types of mutual funds.
11-year-old: If it’s cheap, how can it be good? Can I go play Xbox now?
Me (sighing): Yes. Where is your 15-year-old brother?
The bottom line: Avoid complex investment products. Understand the ones you do own and the purpose they serve in your portfolio. You can build a pretty darn good investment program with 4–5 asset classes. My father, an engineering professor, emphasized the KISS principle while I was growing up: Keep it simple, stupid.* There’s a lot to be said for that.
* Speaking of dads, my fellow Vanguard crew member explains ETFs to his father in this recent blog, which has become the most well-read post since the Vanguard Blog started 7 years ago.
Notes:
- All investing is subject to risk, including possible loss of principal.
- Investments in bonds are subject to interest rate, credit, and inflation risk.
- Please remember that all investments involve some risk. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.
- Diversification does not ensure a profit or protect against a loss.
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