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Kindle Notes & Highlights
by
Ramit Sethi
There’s a funny effect called illusory superiority, which refers to how we all think we’re better than other people (especially Americans). For example, in one study, 93 percent of respondents rated themselves in the top 50 percent of driver skills—an obviously impossible number. We believe we have a better memory, and that we’re kinder and more popular and more unbiased than others. It feels good to believe it! Yet psychology has shown us that we are flawed.
Every mutual fund manager believes he can beat the market. To accomplish this, managers use fancy analysis and data, and they trade frequently. Ironically, this results in lots of taxes and trading fees, which, when combined with the expense ratio, makes it virtually impossible for the average fund investor to beat—or even match—the market over time. Bogle opted to discard the old model of mutual funds and introduce index funds. Today, index funds are an easy, efficient way to make a significant amount of money.
Wall Street is terrified of index funds and tries to keep them under wraps with increased marketing of mutual funds and nonsense like “5-star funds.”
“I believe that 98 or 99 percent—maybe more than 99 percent—of people who invest should extensively diversify and not trade. That leads them to an index fund with very low costs.” —Warren Buffett, one of America’s greatest investors
“When you realize how few advisers have beaten the market over the last several decades, you may acquire the discipline to do something even better: become a long-term index fund investor.” —Mark Hulbert, former editor of Hulbert Financial Digest
Target date funds are my favorite investment of all because they embody the 85 Percent Solution: not exactly perfect, but easy enough for anyone to get started—and they work just fine.
Target date funds are different from index funds, which are also low cost but require you to own multiple funds if you want a comprehensive asset allocation. Multiple funds mean you have to rebalance your funds regularly, usually every year, which is a laborious process of redistributing your money to different investments so you get back to your target asset allocation (or your “pie chart” of stocks vs. bonds vs. cash). What a pain.
That’s why target date funds are great: They’re designed to appeal to people who are lazy. In other words, for many people, the ease of use of these funds far outweighs any minor loss of returns that might occur from taking the one-size-fits-all approach.
If you’re looking for one investment that gets you 85 percent of the way there—which you won’t have to monitor, rebalance, or even pay attention to—then just use a target date fund from the above section.
The first thing you want to do when picking index funds is to minimize fees. Look for the management fees (“expense ratios”) to be low, around 0.2 percent, and you’ll be fine. Most of the index funds at Vanguard, T. Rowe Price, and Fidelity offer excellent value. Remember: Expense ratios are one of the few things you can control, and higher fees cost you dearly—and they just put money in Wall Street’s pocket.
