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August 2 - August 18, 2022
Lethargy bordering on sloth remains the best investment style. The correct holding period for the stock market is forever.
it may be possible to gain excess (greater than market) returns by using a variety of relatively passive rules-based investment strategies that involve no more risk than would be assumed by investing in a low-cost total stock market index fund.
index funds generally provide higher net returns for investors than actively managed funds that try to beat the market.
Thus, the equity investor must be able to accept long periods of underperformance.
This approach is often described as GARP, “growth at a reasonable price.”
At least historically the four factors considered above—value, size, momentum, and low beta—have produced good risk-adjusted returns.
VTI
Smart beta investing with single-factor products has not turned out to be smart investing.
The core of every portfolio should consist of low-cost, tax-efficient, broad-based index funds. If you do want to take a chance that some risk factors will generate improved risk-adjusted returns in the future, you can do so most prudently if the core of your portfolio consists of capitalization-weighted broad-based index funds. And if you do want to add additional risk factors in the pursuit of extra return, I recommend a low-expense multifactor offering rather than a fund concentrating on one risk factor.
I continue to believe that a broad-based total stock market index fund should be the core of everyone’s portfolio.
standard capitalization-weighted index funds are the appropriate first investments they should make.
The harsh truth is that the most important driver in the growth of your assets is how much you save, and saving requires discipline. Without a regular savings program, it doesn’t matter if you make 5 percent, 10 percent, or even 15 percent on your investment funds.
Trust in time rather than in timing.
To get rich, you will have to do it slowly, and you have to start now.
Remember the overarching rule for achieving financial security: keep it simple.
High investment rewards can only be achieved by accepting substantial risk. Finding your sleeping point is one of the most important investment steps you must take.
It is critical that you understand yourself.
The two steps in this exercise—finding your risk level, and identifying your tax bracket and income needs—seem obvious. But it is incredible how many people go astray by mismatching the types of securities they buy with their risk tolerance and their income and tax needs.
Yet the annals of investment counselors are replete with stories of investors whose security holdings are inconsistent with their investment goals.
real estate has proved to be a good investment providing generous returns and excellent inflation-hedging characteristics.
Thus, TIPS have low correlations with other assets and are uniquely effective diversifiers. They provide an effective insurance policy for the white-knuckle crowd.
But many emerging economies have lower debt-to-GDP ratios and better government fiscal balances than are found in the developed world. The emerging economies are also growing faster. Hence, a diversified portfolio of higher-yielding foreign bonds, including those from emerging markets, can be a useful part of a fixed-income portfolio.
Remember also that costs matter when buying mutual funds or ETFs. There is a strong tendency for those funds that charge the lowest fees to the investor to produce the best net returns.
the quintessential low-cost funds are index funds, which tend to be very tax efficient as well.
I believe common stocks should form the cornerstone of most portfolios.
“in the multitude of counselors there is safety.”
the investor who is wise diversifies.
inflation is the deadly enemy of the bond investor.
do believe that it is possible to estimate the likely range of long-run rates of return that investors can expect from financial assets.
the exhibit shows that investors have earned higher total rates of return from the stock market when the initial P/E of the market portfolio was relatively low, and relatively low future rates of return when stocks were purchased at high P/E multiples.
We are likely to be in a low-return environment for some time to come.
more than 90 percent of an investor’s total return is determined by the asset categories that are selected and their overall proportional representation.
Less than 10 percent of investment success is determined by the specific stocks or mutual funds that an individual chooses.
your age, income from employment, and specific responsibilities in life go a long way toward helping you determine the mix of assets in your portfolio.
stocks have provided a compounded rate of return of more than 8 percent per year since 1790.
What about investing in common stocks? Could it be that the risk of investing in stocks also decreases with the length of time they are held? The answer is a qualified yes. A substantial amount (but not all) of the risk of common-stock investment can be eliminated by adopting a program of long-term ownership and sticking to it through thick and thin (the buy-and-hold strategy discussed in earlier chapters).
there is no dependability of earning an adequate rate of return in any single year.
The longer the time period over which you can hold on to your investments, the greater should be the share of common stocks in your portfolio.
Over investment periods of twenty or thirty years, stocks have generally been the clear winners, as is shown in the table below.
Periodic investments of equal dollar amounts in common stocks can reduce (but not avoid) the risks of equity investment by ensuring that the entire portfolio of stocks will not be purchased at temporarily inflated prices.
Your average price per share will be lower than the average price at which you bought shares. Why? Because you’ll buy more shares at low prices and fewer at high prices.
If possible, keep a small reserve (in a money fund) to take advantage of market declines and buy a few extra shares if the
market is down sharply.
For the stock market as a whole (not for individual stocks), Newton’s law has always worked in reverse: What goes down has come back up.
We all wish that we had a little genie who could reliably tell us to “buy low and sell high.” Systematic rebalancing is the closest analogue we have.
Never take on the same risks in your portfolio that attach to your major source of income.
But the key to whether any recommended asset allocation works for you is whether you are able to sleep at night.
subjective considerations also play a major role in the asset allocations you can accept, and you may legitimately stray from those recommended here depending on your aversion to risk.
Under the “4 percent solution,” you should spend no more than 4 percent of the total value of your nest egg annually. At that rate the odds are good that you will not run out of money even if you live to a hundred.
The general rule is: First estimate the return of the investment fund, and then deduct the inflation rate to determine the sustainable level of spending.
