To Be Successful and Wealthy, You Want To Have an Average and Boring Investment Strategy.

27 Jan

The simple path to creating sustainable wealth.

“That’s the paradox of investing today: gunning for average is your best shot at finishing above average” — Tyler Mathisen, Former Managing Editor of CNBC Business News

Successful investing strategies tend to not change over time.

If you are constantly changing strategies, you are trading, not investing.

I’ve written previously on my strategy to retire a multi-millionaire and was taken aback by how much value people found from it.

I honestly thought I was just stating the obvious.

But I am quickly learning that what is common sense to you can be a profound revelation to others. As Warren Buffett famously said: “investing is simple, but not easy.”

If you follow the rules below, you’ll step yourself up to be wealthy over the long term.

#1 Understand This Rule First.

If I asked you what’s the number rule of investing, what would you tell me?

You would probably say: “to make money.”

Well, you would be wrong.

The number one rule of investing is to not lose money.

Warren Buffett said:

“Rule #1: Never lose money. Rule #2: Never forget rule #1.”

This may seem like common sense, but trust me, it is not.

Chasing only financial returns can lead you down the wrong path. The promise of financial returns can hide the risks you’re taking on.

I know people who are pegging their entire net worth on cryptocurrencies skyrocketing. What they don’t realize is the enormous risk they take on playing in unregulated spaces.

Before people jump down my throat, I invest in cryptocurrencies and have been slowly getting into NFTs too. But I am in this for the long-term and I invest fully knowing that my investments could fluctuate wildly.

However, I am not worried about the investment vehicle you choose but rather the thinking behind it. Bad choices that yield good outcomes is still a bad choice. And one day, your bad choices will start to yield bad outcomes.

You should always aim for opportunities with a high upside and a known downside. To create long-term wealth, you want to eliminate as many risks in your investment strategy as possible.

This is why your primary investment strategy should be:

Investing in index funds that track the overall market.

YAWN.

I get it index funds are boring and not sexy to talk about.

And that’s the point.

“Index funds eliminate the risks of individual stocks, market sectors and manager selection,” writes Jack Bogle.

Investing in an index fund is like having a winning percentage on every number on a Roulette table. Slow and steady accumulation. No risk of a huge loss but also no guarantees of a huge win either. You sacrifice the variance for the mean.

Stock picking is like backing individual numbers. You take on more risk with the assumption of greater reward. But whenever you are working with probability, the house has a greater chance of winning in the long term. You sacrifice the mean for the variance.

Sure. You might get lucky once or twice.

Even a stopped clock is right twice a day.

But once you factor in the time to research and the psychological costs of worrying about your investments, are you really winning?

I want my investment returns to be a certainty, not a lottery.

“Index fund is indeed the only investment that essentially guarantees that you will capture your fair share of the returns that business earns” — Jack Bogle

#2 Never Neglect This Rule

“If investors could rely on only a single factor to select future superior performers and to avoid future inferior performers, that factor would be fund costs” — Jack Bogle

Once you’ve chosen your preferred index fund, costs are the friction that can determine whether you can retire wealthy or are still eating canned beans every day for dinner.

Everyone is familiar with compound interest in helping to build your wealth. The interest your interest earns over a lifetime without you ever lifting a finger can make you very wealthy.

But what people often forget is its evil cousin: costs.

If compound interest is your best friend in building wealth, costs are your worst enemy.

Financial guru Ramit Sethi demonstrates the impact a 1% fee can have on your returns. Over a lifetime, 1% fees can erode 28% of your returns. 2% fees can erode up to 58% of your gains.

Still don’t care how important fees are?

People don’t understand that like any law, compounding works both ways. The great news is that you get to decide how you want your money to compound.

“The magic of compounding interest, the tyranny of compound costs. Where returns are concerned, time is your friend. But where costs are concerned, time is your enemy” writes Jack Bogle

There is a wide variance in how much a provider of index funds will charge you. Aim for anywhere between .018–0.04 management fees. Look for options with low to no transaction fees. Reduce every other cost.

#3 Master This Rule

“The greatest enemies of the equity investor are expenses and emotions” — Warren Buffett

The next greatest risk to your investment is what happens between your ears.

People underestimate the role of their emotions and overestimate the role of the market in building their wealth. Your greatest investment enemy can be the person staring back at you in the mirror.

“The finance industry talks too much about what to do, and not enough about what happens in your head when you try to do it.” — Morgan Housel

You get told to reduce expenses, earn a higher income or start a side hustle to build wealth but you neglect to build the mindsets required to become wealthy.

You might be confident when the market is doing well and your investments are up. But could you stop yourself from panic selling when the market drops 57%?

That’s what many people did at the bottom of the Great Recession in March 2009. They vowed never to invest again. Those people missed out on one of the second greatest bull runs in market history. A staggering 330% return from 2009–2019 on their investments.

We saw the same pattern when the COVID-19 pandemic caused a 34% drop in the market and then quickly recovered to a new level by 2021.

If you had the mental resilience to just stick with it you would be doing really well for yourself. Can you see how your mind can be a great wealth builder or wealth destroyer?

If you can buy and hold your index funds no matter what happens, live below your means and contribute regularly, you are setting yourself up for financial success.

“The winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course” — Jack Bogle

#4 Leverage This Rule

“People are frugal in guarding their personal property; but as soon as it comes to squandering time they are most wasteful of the one thing in which it is right to be stingy.” — Seneca

You’ve now got your low-cost index fund and are committed to buying and holding it no matter what happens in the world. What comes next?

If you’re under 35, you have the most powerful wealth-building asset that is no longer available to Warren Buffett, Charlie Munger and Jack Bogle.

What is it?

Time.

Despite what you see in the media, most millionaires don’t become millionaires until their 50’s or 60’s.

Even the greatest investor in the world had to be patient.

“Warren Buffett, currently at 91, has a net worth of more than $81 billion. A large portion of that, however, was accumulated after his 50th birthday. And $70 billion came after he qualified for Social Security benefits, in his mid-60s.” writes Morgan Housel in CNBC.

A good investment strategy is not always about financial returns. If you can have average returns of the stock market for a long period of time, compounding will do the heavy lifting for you.

“You can outperform 80 percent of your fellow investors over the next several decades by investing in an index fund and doing nothing else,” writes Mark Hulbert, editor of Hulbert Financial Digest.

Business Insider found those who start investing in their 20s, no matter the amount, will be better off in the long-term. Small amounts compounded over a long period of time deliver outsized returns.

“The money you save in your 20s is worth exponentially more than the money you save in your 30s or 40s.
If you go onto a compound interest calculator, you can see that the $1 you save in your 20s is worth $21.71 by the age of 60.
Whereas if you save that same dollar when you are 30, it will only be worth $10.06 when you are 60” writes Juliet Collados

Our brains aren’t wired to understand how exponential returns work.

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Michael Lim