Say you have $50,000 a year in income and that is just enough for you to live decently. What do you need to maintain the standard of living years from now? Let’s assume that the traditional inflation rate of the past half century or so in the United States continues in the future. (It’s some three percent annually although we seem to be on the verge of a period when that number will be higher).
What will you need in twenty years to match today’s $50,000? You‘ll require an income of $90,000 a year just to stay in place. You’ll need to increase your yearly income substantially. Successful investing is one way to do it.
That is why we are going through why and how to invest on a regular basis. Investing is something that has both risks and rewards. This chapter and succeeding ones examine strategies for maximizing the latter and reducing the former. The greater the risks one takes in investing, the greater the potential reward and, conversely, the greater the potential losses. It is important to understand both factors.
The MoneySense approach to investing calls for taking risks while trying to reduce the potential losses. It may be described as enjoying a few drinks at dinner, but not getting drunk.
It is a balanced view. It is the idea of having dessert, but not every night. Dessert every night means ending up in the same state as the majority of Americans—fat or obese. Then one is exposing oneself to myriad health risks such as diabetes and heart disease.
When you invest you should remember at the outset—it’s not all desserts and bull markets that go on forever as investors are learning now after close to a decade of good times. There’s going to be lean years and you need to know how to survive them.
But, if you stick to a consistent discipline, a discipline of investing in good times and bad, and if you have the proper mix of different kinds of investments and if you don’t get carried away by unrealistic expectations—and yes, there are a lot of ifs in this sentence, which appears as though it will never end—then your chances of obtaining a strong return and attaining goals are very good.
Don’t Make Mistakes
First, let’s state the Warren Buffett rules of investing: Rule number one: “Don‘t lose money.” Rule number two. Don‘t forget rule number one.” Just as we have stated elsewhere on other money topics, so too this is just as important to investing: Mistakes will kill you and everyone makes some mistakes.
What mistakes?
Getting carried away in a bull market and putting all your money in stocks or all of it in just one stock (Let’s remember some former employees of Enron who kept huge amounts of their assets exclusively in their company stock. That became worthless because of the hi-jinks of Enron chairman Kenneth Lay. He was the man President George W. Bush called “Kenny Boy.”).
Getting depressed in a bear market, believing it will never end and refusing to buy good stocks that have become bargains in the midst of bad markets. For instance, in the spring of 2020, in the midst of a market crash, a long-time successful money manager told me times are tough but this is a good time to continue a regular buying plan. Why?
He said good stocks, given time, will come back.
Besides not having a consistent buying plan that will make money for you over the long term, there is another mistake many people make: Not buying more than one kind of asset, not having a diversified portfolio. The latter means having some bonds as well as stocks.
Bonds in some five-year periods have beaten stocks. For instance, the first years of this century were so bad for the stocks—but not so bad for bonds—that it was called “the lost decade”. That’s because, figuring in inflation, stocks made nothing in the first decade of this century. Yet, in the last five years of the 20th century, stocks, as measured by major indexes, were earning 20 percent a year each year, far outdistancing bonds. I don’t know if we’ll ever see five consecutive twenty percent yearly returns ever again. Actually, I doubt it, but I’m not smart enough to know for certain.
When will bonds beat stocks again?
Yes, sometime they will but I don’t know exactly when. And people who tell you they know the exact direction of stocks and bonds over the next year or two are often charlatans. They are just trying to separate you from your hard-earned money by claiming they have found the Holy Grail of investing.
This is the same madness provided by so many government officials, with their persistent taxing policies, and big institutional money manager mountebanks, who always want more and more of your money. These are people who are not greatly concerned if they wreck the lives of the average person. They’re like many of our career pols. They just want your money.
The key is you should have both stocks and bonds for the long term. What percentage of which depends on your outlook. Are you a moderate, aggressive or conservative investor? How many years do you have to invest?
For example, I am in my late 60s and investing with the idea that I still have some 20 years to go. Today, I am some 50 percent stocks, 40 percent bonds and 10 percent cash. Some might say that’s too much in stocks for a man of my age. But lifespan keeps increasing. I have relatively good health now. So I believe that, even though my wife and I are in good financial shape, we could still use some growth, even at our age. That’s because maybe one of us, or both of us, will make it into the 90s and possibly even beyond. Then we will need more money to live comfortably than we thought twenty or thirty years ago.
Stay the Course
For those starting out, I believe in a consistent buying pattern over years or a consistent selling pattern if you are retired (For more on the latter, please see my chapter on strategies in drawing down retirement assets). So a large part of MoneySense investing is the same thing that makes champions in any contest: Understand that everyone, no matter how smart, makes mistakes.
Even the great Warren Buffett came to regret his investment in U.S. Air. Buffett later sold his shares in the airline. And, much to his credit, he publicly questioned the investment and wondered how he could have made such a mistake, especially in putting money into an industry in which costs, plane fuel, were difficult to control or predict.
Buffett’s public acknowledgement of a mistake is one reason why I have respected Buffett. He has a great record, but he is a modest man who admits and even broadcasts his mistakes, infrequent as they are. Want more on him? The Buffett biography, “The Snowball,” by Alice Schroeder is an excellent work.
However, minimizing mistakes is how to ultimately succeed. And avoiding mistakes comes from being careful and profiting from past errors. It also comes from observing the errors of others. This acknowledgement of your own limitations promotes a kind of humility that recognizes and allows one to profit from the stumbles of others.
Still, if you invest long term, you will make some mistakes. You should expect it, says money manager Kenneth L. Fisher. The goal should be identifying errors you’re likely to make and try to avoid those. And failing to stick with an appropriate strategy is a major error many investors make. (See “Plan Your Prosperity,”p21, (John Wiley & Sons, 2013, New York).
One way to avoid or minimize mistakes is through the use of time. By committing to a realistic long-term investment program—a sensible program that mixes different kinds of investments—that can weather bad times and good, one increases the chances of doing well. Let’s discuss how and where to get started. And let’s discuss a concept such as dollar cost averaging. Let’s do that in our next chapter.
