We’re ready to invest for the long term in order to beat those pesky things that sap one’s standard of living—taxes and inflation. And the latter is really another kind of tax. And, luckily for our political masters, most overworked taxpayers don’t seem to understand it is caused by too much money printed by the central bank chasing too few goods. So let us begin with a few MoneySense investment principles.
*Investing Is a Marathon not a Sixty Yard Dash:
You expect to make big money and achieve financial independence overnight? You’re in the wrong place. Play the lottery and good luck to you. That’s because you’ll need it. And while you’re at it, why not also respond to that Internet scam about gold mines in Nigeria? Or listen to stock jockeys who tell you that you should bet your life savings on the latest hot stock. It is usually a hot stock that their bosses are perhaps pushing them to sell. In other words, if you feel this way despite what I have written, then remember one more thing: A fool and his money are soon parted.
*Get Rich Slowly:
The majority of formerly middle class or poor people who either achieved wealth or simply became financially independent did it gradually.
They consistently invested over long periods. They looked at investing the way they looked at paying monthly bills. Investing is a regular expense along with others. And they didn’t skip months putting money into funds, stocks or bonds. They did it every month. These patient folks didn’t get discouraged and give up because they had to live through some bear markets.
They didn’t sell everything in 2008 or the early part of 2020 because markets were down.
Here’s a portrait of a smart investor who isn’t panicky and unfailingly invests month after month: From the time markets were depressed in March 2020 owing to the Covid crisis until a year later, the market, as measured by the S&P 500, was up some 53 percent! That’s despite lots of his friends and neighbors who panicked and sold everything in the spring of 2020 or in 2008 or in 1987 or one of many other times when markets were depressed and seemed as though they were never recover.
Usually, the smart investor started with very little, but he or she stayed with it for 20 or 30 years or maybe longer.
These wise, patient folks are not flustered. They continue to buy good stocks even in bad times such as in the middle of the Coronavirus outbreak or in the middle of the first decade of this century. This constant buying strategy was brilliantly explained by Wall Street Journal columnist Jason Zweig in an October 2016 “Intelligent Investor” column. He said that by sticking to a plan of buying stocks in good times and bad, these smart investors enjoyed not one, but several bull markets.
For example, the S&P 500 Index lost money over the first decade of this century (-1.2% a year from 2000-2009. That led many commentators to call it the lost decade).
But for patient investors, those who were investing in the market some 35 years, from 1976 to the end of 2011, the returns were good. The S&P index gained 10.6% a year. A person who was steadily investing each month, month after month in bad as well as good times, did very well. However, some investors never got anywhere near jumped in and out over those 35 years. These people without a consistent investing plan never received anywhere near 10.6%, which is an excellent long-term rate of return.
They didn’t stick to the program and that cost them dearly. Many of them lost their biggest chance to obtain financial independence. The point is to stay invested over long periods and not try to guess when markets have made new highs or lows. Most of us don’t have a clue when those things happen so, if we’re smart, we don’t try. However, many other investors play the fool’s guessing game.
Dalbar, an investment research company, has done studies documenting how the average investor self-destructs. The company has shown how a particular fund gained 11 percent in a year, but the average investor in the same fund only gained about half as much.
How could that happen?
The investor jumped in and out of the fund over the year. He often missed the best days of the market. He thought he could choose the best days and avoid the worst. He was wrong. That’s why many average investors never seem to obtain good long-term returns. They have no discipline.
This poor record on many individual investors is because the market tends to go up and down in short spurts. But it is almost impossible to call these spurts beforehand, jumping in and out of the market. It is better to invest consistently over long periods. And, by the way, it is also sensible to do the reverse when you retire. You should disinvest slowly in retirement. (For more on the latter, please see my later chapter at the end of the book for retirees or those near retirement).
*Be Rational and Avoid Emotion:
The coach with the most national championships in American men’s college basketball history, UCLA’s John Wooden, said that one shouldn’t get carried away by victories or depressed by defeats. Don’t get too high or too low. Anyone who is investing over the long period is going to experience both highs and lows. Learn to live with them.
Bad investors reacted irrationally at the bottom of a market. For example, I know of several people who got out of the market in the horrible year of 2008 and swore they would never invest in the market again.
Guess what happened?
The next year, 2009, was a great year for the market. And a year like 2008 can be good over the long run for patient investors who buy through thick and thin. That’s because in a bear market year they get to buy some stocks at bargain prices. That’s when no one seems to want them and they are on sale.
Later, the patient long-term investor is rewarded for bargain hunting patience. MoneySense doesn’t have a hot stock tip for you. MoneySense offers you history and says learn and benefit from it.
*Get Started Early:
It doesn’t matter that, say, you‘re only putting $100 a month into stocks or stock funds as long as you do it each month. You can always increase the amounts later on as you make more money. What matters is to start as early as possible and not put it off. It is also important that you stay with it—you don’t break into your investments for frivolous purchases and ruin the compounding process—and that you start as early as possible.
The more years you systematically buy stocks or stock funds, the better, the less dangerous investments are, and the more bull markets you will likely enjoy.
*Longer Is Better:
Think you’re at the end of your journey? Trying going a few more miles. It can be a big payoff. Just a few extra years of investing can make a huge difference. Here’s an example: Say you commit to putting $500 a month into stocks for 30 years. They earn a yearly average of nine percent—not a great return, but not a bad one. After 30 years, you have $1,481,924 before taxes. Terrific.
But let’s say you continue the program for just five more years. You continue to put in $500 a month and again you earn nine percent a year. O.K., obviously you have more. But how much?
A lot more.
You have about $900,000 more, or a total of $2,358,215. Those five years increased your final total by about 60 percent! Valgame Dios! Victory usually goes to the patient; to the person who realizes how important the compounding process is and gets the most out of it. That person is you, Ms., Mr. MoneySense.
Longer is incredibly better, even if it is just slightly longer. If you can hang in with an investment program even for an extra year or two or get started as early as possible, do it. The compounding effect, if you put it in place and let it go on as long as possible, can make almost anyone financially independent. Albert Einstein supposedly said that compounding is “the eighth wonder of the world.”
Did he really say it? I don’t know. After a while it doesn’t matter. That’s because the most important thing about the adage is this: It is true. Compounding is a huge factor in creating wealth.
*Watch the Expenses:
One of the characteristics of a MoneySense investor is that he or she doesn‘t waste resources. In other words, he or she is a cheap (fill in name). In my case it is my nickname in Spanish. (El Mas Tacano de Todos. Translation: The Stingiest of Them All. My wife, the ever-comely Suzanne Hall, says if I were president, the United States would have no deficits or debts. However, we’d all be walking around with holes in our shoes. My wonderful mother used to say, “Greg, could make a dime cry,” which doesn’t sound good).
MoneySense people don’t throw away money on credit card interest charges. Those are resources that can be tapped to make you well off. And that common-sense idea shouldn’t be different for money spent on investments.
In anything that you try, always consider the costs of accomplishing it. Costs matter a lot, especially in investing. This is a piece of wisdom that was countlessly said by one of the best friends the individual investor ever had—John Bogle, the founder of the Vanguard Funds.
Vanguard was once a pipsqueak of a fund company when it was founded in the 1970s. Vanguard was ridiculed for using the relatively new investing tool of index investing. Yet today it is one of the great fund companies in the world.
And it is not just because it, like many other fund companies, has gathered a lot of assets and the company is profitable and many of the company’s big shots are rich. More importantly, it is because it has made millions of average people much better off. It has allowed many of us to achieve financial independence and say goodbye to regular rides on the gosh awful E-train.
Thanks, Mr. Bogle.
Let’s talk some more about mutual funds. The average domestic stock fund, according to the fund rating service Morningstar, has an expense ratio of about 1.3 percent or 1.4 percent for a managed fund. The latter is a fund that is actively managed and runs up big brokerage expenses because it does a lot of trading and is often changing the portfolio. All these charges are passed on to you, the individual investor.
Why does it spend so much of your geld?
It’s because the fund managers often can’t make up their minds about which “hot” stocks they want. They often buy as well as sell a lot. The problem is that you pay for their indecision. That’s because every time someone buys or sells stocks the manager is triggering a bill. (And by the way, when they buy lots of shares, it often drives up the price of the stock. That makes it more expensive for the company to buy. All of this drives up costs. And, of course, you are handed the bill).
By contrast, let’s look at the average expense ratio of a good index fund. It is a passively managed investment. That’s because it does little trading. Its passive management means its expense ratio on average is only about 0.2 percent. It invests in its stock index—possibly the S&P 500 or the Nasdaq index—once a year and it is done trading for the year.
That’s about 1.2 percent less you’re spending on your investment each year. Remember, the lowest costs are the goal of smart investors. That lower cost promotes better performance. The superiority of using low-cost funds, funds often called passive or index funds is detailed by Bogle in one of his books, “The Clash of Cultures—Investment vs. Speculation, p 182, (John Wiley & Sons, New York, 2012).
In the short term, the larger expense is no big deal. But over the long term, ten, twenty or thirty years, it is huge. This “I’m not wasting my money” philosophy can amount to tens of thousands of dollars in savings for the average investor. It is a critical factor in long-term investing success.
That’s money that stays in your pocket. That’s money that doesn’t go to the mutual fund company or their favorite brokers. That’s money that doesn’t buy yachts for your advisers and snazzy offices for the fund company. And many fund companies spend money like they were running the federal government, which, whether under left-wing or right-wing administrations, seems to spend your money like it’s going out of style.
I don’t like to see any of my fund companies advertising during the SuperBowl.
That’s usually the most expensive ad space over the course of the television year. And why pays for those ads?
I figure the ad money is coming out of expenses that are passed on to me as an investor. By the way, I’ve never seen a Vanguard or TIAA/CREF commercial during a SuperBowl broadcast.
*Be a Finicky Consumer:
Ever notice how when some people get control of your money they can start spending it like drunken sailors? Many fund companies—like lawmakers perpetually raising taxes to finance more programs they think will keep them in office or allow them to run for a higher one—aren’t thinking of how they are spending your money or the money of unborn generations of taxpayers. You have to look out for your money. These pols won’t. It’s your property. It doesn’t belong to the mutual fund company.
That means that whenever you use a financial product—such as buying funds or a stock—that you approach it the same way you go shopping: You constantly examine and compare costs. Then you ask a lot of questions.
For example, say you hire an adviser to put together a financial plan or you hire a broker to buy securities for you. (And later on, I’ll have some recommendations on advisors).
How do these advisors get paid and how much? You want to know what they are getting paid in comparison to other financial professionals. The price of investments can be one of the important issues in buying a security, as we have seen. It can make a huge difference in your returns and whether or not you achieve your goals.
Consider a sports team as an analogy. To win, it is important to score a lot. But it is equally important, possibly more important, to prevent runs/points scored against you. Winning in sports, or investing, means limiting scores against you or investment costs that reduce your returns.
By the way, I am a New York Yankee fan. I grew up four blocks north and west of Yankee Stadium. In the concluding game seven of the 1960 World Series, the Yankees scored nine runs. That’s usually more than enough runs to win an average game. Unfortunately for my Yankees that day they gave away a lot of runs. They got sloppy—the same way a lot of funds are run—and the Pittsburgh Pirates scored ten runs and won the World Series. Limiting costs and mistakes, in investments and baseball, matter. Over the long run, costs matter a lot whether we talking about a particular investment or a financial professional you use.
*How Does He or She Charge and Conduct Business?
Compare prices. Compare how they conduct business because some are fiduciaries—a legal requirement that a professional must put the needs of the client before those of himself or herself—and some are not and possibly will be taking care of their employer before they take care of you. I will also discuss this later.
Let me give an example of this shopping around, looking for bargains, principle. Most days I buy various fruits. Blueberries are my favorite. But just because they’re my favorite is no reason to overpay. Two blocks away from my apartment house on Metropolitan Avenue, in my Central Queens neighborhood in New York City, there is a fruit stand. Across the street is a small supermarket with a big fruit section. I never buy blueberries without surveying the prices at both. Quite often they are different. All it takes is a walk across the street—watch the traffic as you cross Metropolitan Avenue; many drivers still think they’re driving on a nearby highway, the Jackie Robinson—to determine if there’s a bargain available.
Rarely are the prices the same. Sometimes I have bought blueberries for a dollar or two dollars less a box just because I checked; just because I dodged the cars on Metro. Do the same with investments. Check before you buy investment products or services. Shop around. It can make a big difference.
Never throw away your money. There are plenty of pols who are happy to do that for you every day unless, on the rare occasion, someone stops them. And that infrequently happens in the advanced welfare state. The latter is a state in which almost every major party assumes that more government is always better government and will get them elected or re-elected. The truth is usually the opposite. Less government, as Thomas Jefferson knew, is usually better government, but don’t tell that to our career pols with their “perpetual” campaigns.”
We have discussed why we invest and some of the broad philosophies of investing. Before we go on to some investment specifics, I believe there are some readers who are saying:
“Yes, it makes sense to invest over the long term, but I haven’t got any money to do that now. And, if I’m being truthful, I’m not sure I ever will.”
That’s a fair criticism. But is it true? In many cases I believe it is not. Almost all of us, at one time or other, have been wasteful about our money.
Please Keep Reading
Now to this reader I ask: Before dismissing the premise of this book—that the intelligent management of money can make most people financially independent and that many people with middle-class incomes can do it—would you please read just one more chapter?
For the rest of you, those who are ready to invest and want specifics, I ask for your patience. But it won’t be a waste of time for you. Indeed, in the next chapter I will have some advice on how you can possibly find more money to invest more than you originally thought.
But first, let us pose a question, a question that I have posed to myself and to others many times: How does the average person—people like yours truly and many of my friends and neighbors, a kind of person often referred to as a “working stiff”—someone who doesn’t make fabulous money, someone who is not a partner in a bigtime law firm or CPA firm or a quarterback on some great football team or the centerman on the number one line of a team that wins the Stanley Cup—find the money to invest?
Not letting investment money get away, money that could be used to build wealth, will be the subject of our next chapter. Let’s go find some money. And let’s use it, or a big part of it, to build an investment program that will make a person financially independent.
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