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If Paul makes five investments, each for $1 million, and four in a row go to zero, then he’s lost a total of $4 million. But if the fifth investment is a home run and makes $5 million, he’s earned back his entire $5 million investment.
CORE PRINCIPLE 3: TAX EFFICIENCY
CORE PRINCIPLE 4: DIVERSIFICATION
“It’s almost certain that whatever [asset class] you’re going to put your money in, there will come a day when you will lose 50%–70%.”
If you find internal certainty, you’ll actually be excited when the market crashes.
In short, bad news is an investor’s best friend.
Conservative investors who are retired or can’t tolerate the volatility of stocks might choose to invest a large percentage of their assets in bonds.
you earn nothing these days if you keep your money in cash. In fact, after inflation, you’re losing money by holding cash. At least bonds provide some income.
Historically, stocks, bonds, energy commodities, and real estate have outperformed gold. So count me out.
never bet your future on one country or one asset class.
Use Index Funds for the Core of Your Portfolio.
The core component of our clients’ portfolios is invested in US and international stocks. We use index funds because they give you broad diversification in a low-cost, tax-efficient way, and they beat almost all actively managed funds over the long run. For maximum diversification, we want exposure to stocks of all sizes: large-cap, midcap, small-cap, and microcap. By diversifying so broadly, you protect yourself against the risk that one part of the market (say, tech stocks or bank stocks) could get crushed.
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 the proceeds to invest in the stock market at low prices. This puts us in a strong position where we can view the bear as a friend rather than a fearsome enemy.
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. If stocks crash, we can tap these income-producing assets to meet our clients’ short-term needs.
I’m a big believer in “rebalancing,” which entails bringing your portfolio back to your original asset allocation on a regular basis—say, once a year.
Here is how it works: imagine you start with 60% in stocks and 40% in bonds; then the stock market plunges, so you find yourself with 45% in stocks and 55% in bonds. You’d rebalance by selling bonds and buying stocks.
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.
there’s only one real barrier to financial success: you! Once you know how to silence the enemy within, nothing can stop you.
it’s never wise to fall in love with an investment. As the saying goes, love is blind!
“Forget what you know about buying fair businesses at wonderful prices; instead, buy wonderful businesses at fair prices.”
The beauty of rebalancing, says Harry, is that it effectively forces you to “buy low and sell high.”
It’s a Marathon, Not a Sprint
you need to diversify broadly, not only in different asset classes but also in different countries.
Everything in life either grows or dies. That goes for relationships, businesses, or anything else. If you don’t keep growing, you’ll become frustrated and miserable, no matter how many millions you have in the bank. In fact, I can tell you the secret to happiness in one word: progress.
We’re driven by our desire to contribute. If we stop feeling that deep sense of contribution, we can never feel truly fulfilled.
unless you help yourself first, how can you hope to help others?
most achievers much prefer to think they’re stressed than fearful. But “stress” is just the achiever word for fear! If I follow the trail of your stress, it’ll take me to your deepest fear.
our suffering is caused by focusing or obsessing about ourselves and what we might lose, have less of, or never have.
The secret of living an extraordinary life is to take control of the mind, since this alone will determine whether you live in a suffering state or a beautiful state.
will you commit to enjoying life not only when everything goes your way but also when everything goes against you,
Whenever I start to suffer, I give myself 90 seconds to stop it so that I can return to living in a beautiful state.
Why gratitude? Because you can’t be grateful and angry at the same time.
I’m going to live in a beautiful state every day of my life—and
Nothing enriches us as much as helping others.
