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Diversify Across Time. You’re never going to know the right time to buy anything. But if you keep adding to your investments systematically over months and years (in other words, dollar-cost averaging), you’ll
“The holy grail of investing is to have 15 or more good—they don’t have to be great—uncorrelated bets.”
PREPARE FOR THE BEAR
A simple rule dictates my buying: be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread. —WARREN BUFFETT IN OCTOBER 2008, explaining why he was buying stocks as the market crashed
Here’s what you have to remember, based on more than a century of history: the short-term outlook may look dire, but the stock market always rebounds.
Historically, the stock market has returned an average of 9% to 10% a year over more than a century. But these figures are deceptive because stocks can be wildly volatile along the way. It’s not unusual for the market to fall 20% to 50% every few years. On average, the market is down about one in every four years.
In short, bad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price. Over the long term, the stock market news will be good.”
be patient, unshakeable, and ultimately
More aggressive investors might keep a portion of their money in bonds to provide them with “dry powder” that they can use when the stock market goes on sale.
approach involves using a person’s age to determine the percentage of bonds in his or her portfolio. For example, if you’re 55, you’d have 55% of your assets allocated to bonds. To me, that’s crazily simplistic. In reality, the type of assets you own should be matched to what you personally need to accomplish.
Asset Allocation Drives Returns. Let’s start with the fundamental understanding that your asset allocation will be the biggest factor in determining your investment returns. So, deciding on the right balance of stocks, bonds, and alternatives is the most important investment decision you’ll ever make.
large-cap, midcap, small-cap, and microcap.
Always Have a Cushion. You never want to be in a position where you’re forced to sell your stock market investments at the worst moment. So it makes sense to maintain a financial cushion, if at all possible. We make sure our clients have an appropriate amount of income-producing investments such as bonds, REITs, MLPs, and dividend-paying stocks. We also diversify broadly within these asset classes: for example, we invest in government bonds, muni bonds, and corporate bonds. If stocks crash, we can sell some of those income-producing investments (ideally bonds, since they are liquid) and use
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The Rule of Seven. Ideally, we like our clients to have seven years of income set aside in income-producing investments such as bonds and MLPs.
One benefit of rebalancing, says Malkiel, is that it “makes you do the opposite,” forcing you to buy assets when they’re out of favor and undervalued. You’ll profit richly when they recover.
This is why investors also need simple systems, rules, and procedures to protect us from ourselves.
starts with 60% of her portfolio in stocks and 40% in bonds. If the stock market soars, she might find herself with 70% in stocks and 30% in bonds. So she would automatically sell stocks and buy bonds, thereby restoring her portfolio to her original asset allocation ratio. The beauty of rebalancing, says Harry, is that it effectively forces you to “buy low and sell high.”
“Just invest in an index.” Index funds also give you broad diversification, which is another powerful
The best way to win the game of investing is to achieve sustainable long-term returns. But it’s enormously tempting to swing for home runs, especially when you think other people are getting rich faster than you!
Warren Buffett says, “The stock market is a device for transferring money from the impatient to the patient.”
Remember: on average, corrections have occurred about once a year since 1900, and bear markets have occurred about once every three to five years.
Because investing is a game of inches. If your returns improve by, say, 2 or 3 percentage points a year, the cumulative impact over decades is astounding, thanks to the power of compounding.
For example, these simple rules and procedures will make it easier for you to invest for the long term; to trade less; to lower your investment fees and transaction costs; to be more open to views that differ from your own; to reduce risk by diversifying globally; and to control the fears that could otherwise derail you during bear markets.
