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March 7 - March 20, 2020
Waste no more time arguing about what a good man should be. Be one. —MARCUS AURELIUS Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver. —AYN RAND
So never forget about these two ferocious foes of stock market success: fear and fees.
The gross return of the market minus the cost of investing equals the net return to investors.
By buying low-cost, broad-market index funds (and holding them “forever”), you can guarantee that you will receive your fair share of whatever returns the financial markets provide over the long term.
When you’re truly unshakeable, you have unwavering confidence even amidst the storm.
When people are forced to make financial decisions, they often act out of fear—and any decision made in a state of fear is likely to be wrong.
One study showed that 96% of mutual funds failed to beat the market over a 15-year period.I The result? You overpay for underperformance.
“When a person with experience meets a person with money, the person with experience ends up with the money; and the person with money ends up with an experience.”
What I do know for sure is that compounding is a force that can catapult you to a life of total financial freedom.
But maybe it’s time to give yourself a raise: increase what you save from 10% of your income to 15%, or from 15% to 20%.
The single best place to compound money over many years is in the stock market.
When any market falls by at least 10% from its peak, it’s called a correction—a peculiarly bland and neutral term for an experience that most people relish about as much as dental surgery! When a market falls by at least 20% from its peak, it’s called a bear market.
the biggest danger isn’t a correction or a bear market, it’s being out of the market.
Freedom Fact 1: On Average, Corrections Have Occurred About Once a Year Since 1900
Historically, the average correction has lasted only 54 days—less than two months! In other words, most corrections are over almost before you know it.
Freedom Fact 2: Less Than 20% of All Corrections Turn Into a Bear Market
It turns out that fewer than one in five corrections escalate to the point where they become a bear market. To put it another way, 80% of corrections don’t turn into bear markets.
Freedom Fact 3: Nobody Can Predict Consistently Whether the Market Will Rise or Fall
physicist Niels Bohr: “Prediction is very difficult, especially about the future.”
Freedom Fact 4: The Stock Market Rises over Time Despite Many Short-Term Setbacks
The great thing is that you benefit from these upgrades in the quality of the companies in the index. How? Well, as a shareholder of an index fund, you own part of the future cash flows of the companies in that index.
Freedom Fact 5: Historically, Bear Markets Have Happened Every Three to Five Years
“The best opportunities come in times of maximum pessimism.”
Freedom Fact 6: Bear Markets Become Bull Markets, and Pessimism Becomes Optimism
Why? Because the stock market isn’t looking at today. The market always looks to tomorrow. What matters most isn’t where the economy is right now but where it’s headed. And when everything seems terrible, the pendulum eventually swings in the other direction. In fact, every single bear market in US history has been followed by a bull market, without exception.
The stock market is a device for transferring money from the impatient to the patient. —WARREN BUFFETT
Freedom Fact 7: The Greatest Danger Is Being out of the Market
You miss one hundred percent of the shots you don’t take. —HOCKEY HALL OF FAMER WAYNE GRETZKY
“Don’t do something—just stand there!”
Hell is truth seen too late. —THOMAS HOBBES, seventeenth-century British philosopher
The name of the game? Moving the money from the client’s pocket to your pocket. —MATTHEW MCCONAUGHEY TO LEONARDO DICAPRIO IN THE WOLF OF WALL STREET
If you’re looking to achieve financial security, the obvious route is to invest in mutual funds.
Mutual funds offer a simple and logical alternative. For a start, they provide you with the benefit of broad diversification, which helps to reduce your overall risk.
What service is it that funds are supposed to provide? Well, when you buy an actively managed fund, you’re essentially paying for the manager to generate market-beating returns. Otherwise wouldn’t you be better off just sticking your money in a low-cost index fund, which attempts to replicate the returns of the market?
Like poker, investing is a zero-sum game: there are only so many chips on the table. When two people trade a stock, one must win and one must lose. If the stock goes up after you buy it, you win. But you’ve got to win by a big enough margin to cover those transaction costs. Wait, it gets worse! If your stock goes up, you’ll also have to pay taxes on your profits when you sell the stock. For investors in an actively managed fund, this combination of hefty transaction costs and taxes is a silent killer, quietly eating away at the fund’s returns!
When you own an index fund, you’re also protected against all the downright dumb, mildly misguided, or merely unlucky decisions that active fund managers are liable to make.
What about index funds? Instead of sitting on cash, they remain almost fully invested at all times.
“When you look at the results on an after-fee, after-tax basis, over reasonably long periods of time, there’s almost no chance that you end up beating the index fund.”
You’ve got to look very carefully at the small print. I don’t like things that require small print, by the way. —JACK BOGLE
It is difficult to get a man to understand something when his salary depends on his not understanding it. —UPTON SINCLAIR
By contrast, RIAs don’t accept sales commissions. Instead, they typically charge a flat fee for financial advice, or a percentage of their clients’ assets under management. It’s a cleaner model that removes awkward conflicts of interest.
Competence is such a rare bird in these woods that I appreciate it whenever I see it. —FRANK UNDERWOOD, House of Cards
Let’s make it simple. Really simple. —STEVE JOBS, cofounder of Apple
What I’ve found over almost four decades of studying success is that the most successful people in any field aren’t just lucky. They have a different set of beliefs. They have a different strategy. They do things differently than everyone else.
The key is to recognize these consistently successful patterns and to model them, using them to guide the decisions you make in your own life. These patterns provide the playbook for your success.
But the best investors are obsessed with avoiding losses. Why? Because they understand a simple but profound fact: the more money you lose, the harder it is to get back to where you started.
“Rule number one: never lose money. Rule number two: never forget rule number one.”
“The most important thing for me is that defense is 10 times more important than offense. . . . You have to be very focused on protecting the downside at all times.”
That, my friend, is an insight that you and I should never forget: we have to design an asset allocation that ensures we’ll “still be okay,” even when we’re wrong. Asset allocation is simply a matter of establishing the right mix of different types of investments, diversifying among them in such a way that you reduce your risks and maximize your rewards.
It simply means that we should invest in ways that help to protect us from nasty surprises.
