To My Wife And Children

I've created this blog - and writing this post - for my wife and children with the hope they find (and heed) these words after I'm long dead and gone.

Investing in today's world is very simple - but only if you faithfully follow - without fail - some very simple rules.


RULE ONE:
BUY ONLY INDEX FUNDS AND IGNORE ALL STOCK BROKERS/ADVISORS

I believe in what is known as the "efficient market theory". Simply put, it means that the market is efficiently priced - that all possible information is known and already factored into the current price - and that what the market does tomorrow is unknowable. Therefore although some "experts" may appear to have actually beaten the market in the past, in truth they merely represent expected statistical outlyers - the statistical minority that will be expected to flip "heads" 10 times in a row and thus "appear" to beat the odds.

The biggest single threat to your financial health is believing that "experts" can manage your money for you - that "experts" can recommend stocks or mutual funds to buy or sell. I call these so called experts "Wall Street Predators" because they can only make their living by preying upon financial ignorance. In a "just world" they would be declared illegal and would come with warning labels far more prominent than those forced on the tobacco industry - and trust me - they are every bit as dangerous, if not more, to your financial health as cigarettes are to your bodily health.

Don't be fooled. These so called "experts" do not exist. There will always be individual stocks that will beat the market but nobody can predict which stocks they will be. Likewise there will be individual mutual funds that will also "beat the market" but, once again, nobody can predict which ones they will be. So, principal number one - the one guiding rule that just never be forgotton - the largest danger to your financial health are the Wall Street Predators - stock brokers, stock brokerage firms, insurance companies selling financial products, load mutual funds and actively managed mutual funds, and all sorts of investment advisers - and this includes virtually all of the print and television media - they all want to sell you financial products and financial advice. Turn them off and tune them out. DO NOT use stock brokers. DO NOT buy financial products. DO NOT listen to the financial media whether that be on television or newspaper or magazine.

You invest one way and one way only. You use a mutual fund known as an index fund that holds every single stock in the entire stock market and thus you are investing in the market itself and it is managed by a computer, not by some person who believes he can predict which stock buy and which to sell. And you will use just one mutual fund company - Vanguard Mutual Funds - due to their unique "ownership" structure and devotion to the lowest management fees in the industry.


RULE TWO:
UNDERSTAND ASSET ALLOCATION

The second principle is the importance of asset allocation - in simplest terms the precentage of your money to put in stocks and the percentage to invest in bonds (and cash). The simplest - and perhaps best - approach for most investors is to own two funds - Vanguard Total Stock Market Index and Vanguard Total Bond Index. The investor need only determine the percentage of allocation between stocks and bonds.

The allocation decision, however, is itself a critically important decision. It has been well documented that the allocation decision - the percentage of a total portfolio allocated to stocks and the percentage allocated to bonds, will determine 90% of the portfolio's actual return (and the choice of which funds or stocks to own accounting for a mere 10% of overall return). Thus the stock/bond decision is a crucial one. For this reason, most investors (my wife and children) are probably best served leaving that decision to the experts and investing in just one fund - Vanguard's Target Retirement Fund (the specific fund determined by the target date of retirement). The Vanguard Retirement Fund is a "fund of funds" - it doesn't directly buy stocks or bonds - it merely buys other Vanguard funds (specifically the Total Stock Market Index, Total Bond Index, and Total International Index). The magic is that you leave to the "experts" the decision regarding the percentage allocation decision - which the fund determines by your "target retirement date".

Note that the choice of the word "retirement" is indeed unfortunate and should not be confused with retirement accounts. This fund is perfect for both retirement accounts (such as IRA and 401k accounts), and is equally appropriate for taxable accounts. Indeed, since the idea is that you are having the fund manager this theory of investment only really works if the investor makes this the only investment of his/her entire portfolio because the allocation decisions of the fund are made with the presumption that the stock/bond allocation is being applied to all of the investor's assets. Alas, most of us are unable to allocate all of our assets into one Vanguard fund because we don't control where our money is being invested.

An alternative is to own Vanguard's Target Retirement Fund and check it's allocation quarterly/annually and mirror that allocation in the rest of the portfolio. At this point in time I track Vanguard's Target Retirement Fund 2020 allocations as a guide to my own allocation decisions.