20 Principles For Successful Investing

And we're going to talk about investing, so let's do that. I just want to give you a few principles to think about when it comes to investing. The first one is don't buy investments that you don't understand. Right? I run into people all the time. They're like, I didn't know this investment could do that, or I didn't know there was a surrender fee, or I didn't really understand how that worked, or I didn't understand the tax consequences of that investment. I run with people all the time. Don't buy stuff you don't understand, okay? And while that often is something like whole life insurance, not always. There's lots of investments out there that are fine investments, but you need to understand how they work, what the risk of the investment is, what likely returns are, how it's taxed, who's getting a cut of fees, and all that sort of stuff. You need to understand it. The next principle is to limit speculation with your investments. Now, what's a speculative investment or speculative instrument? It's something that doesn't generate any rents or interest or dividends or earnings, right? We're talking about stuff like precious metals, gold, platinum, silver. We're talking about a lot of crypto assets like Bitcoin, Ethereum. We're talking about empty land, we're talking about Beanie Babies, we're talking about commodities, right? If you want to speculate in these sorts of investments, you need to limit how much your portfolio goes into them. And the usual rule of thumb I throw out is 5%. You want to put 5% in Bitcoin, fine. And put 5% in gold, fine. No big deal, right? But if you're putting 50% of your portfolio into these sorts of investments, that's a mistake. Don't be doing that, all right? Limit the speculation with your investments, all right? You've heard that more risk equals more reward or more return. But what you may not understand is that higher investment risk is a necessary but not sufficient condition for higher returns. Just taking on more risk doesn't necessarily mean you're going to get higher returns. For example, some risks are not compensated. The classic uncompensated risk is buying individual stocks, right? You're trying to pick the next Nvidia, but the truth is you can diversify away that risk. And if you can diversify a risk away, why should you be paid for it? You don't get paid for it. It's uncompensated risk. Doesn't mean it can't pay off. You shouldn't expect it to pay off, at least on average. Speaking of diversification, that's the next principle, right? Diversify your portfolio. Seems super obvious, but people don't do it. I hear about people complaining that they lost $100,000 in a hard money loan, right? You don't have to put $100,000 into a single hard money loan. You could have put that in a fund that had 80 loans, right? These things do go into foreclosure. Some 2 or 3% of them or so go into foreclosure, right? Usually don't lose all your principal when that happens. But you know, diversify. Use a fund, you know, own enough of them that if one of them tanks completely, you don't get hurt. You know, it's same thing with stocks. Diversify them. You can buy them all for three basis points by using a Vanguard ETF, right? You can have 4,000 US stocks. Buy them all in 30 seconds. Diversify, diversify, diversify. Not only within an asset class, but between asset classes, right? The classic ones, stocks, bonds, real estate, Right. If you want to add some other stuff in, that's okay too. But diversify, okay? Here's another important principle. Invest when you get the money. Timing the market is really hard. It's probably impossible in the long term, but if you're like most docs, you're going to have something to invest every month for the next 10, 20, 30 years. So when you get paid, invest. And what will happen over time with this periodic investing you're doing? A lot of people like to call it dollar cost averaging, but it's actually technically something else. But this periodic investing is that sometimes you're going to get a really good price on the investments you're buying. Sometimes you'll get an okay price and sometimes you'll pay a little too much. But on average, you're going to end up getting a more favorable price. And the truth is that time in the market matters a lot more than timing the market. Having bought stocks at any point in 2004 is a better deal than timing it exactly in 2019, right? That time in the market matters gives your money much more time to compound. Likewise, if you can invest beginning of the year instead of the end, do that. Delay purchases if you can, so you can invest first, all right? Some people have a hard time putting things on autopilot, right? If you can't resist timing the market, at least try to do the opposite of what the crowd's doing, right? Buying something after it just went up 1800% in the last year is probably not a great strategy to invest, right? We're talking about meme stocks and, you know, bitcoin after it goes up, 4x, that sort of a thing, right? The time to buy this stuff is when nobody's interested in it, right? It doesn't feel right. But the end, it's at least more likely to be right. But at the same time, you got to be careful with what they call catching a falling knife, right? Just because something went down in price doesn't mean it's going to go back up. Sometimes it's just on its way to zero. And just because it went from $80 a share to $20 a share doesn't mean you should buy it because the next stop might be $2 a share or $0 a share. So be careful catching falling knives. Another important principle is that past performance does not guarantee future performance. They're required to put that in a mutual fund prospectus. There's a reason for that is because it's true. Unfortunately, the natural thing to do is look back at the last year, three years, five years, 10 years, whatever, and just pick out whatever did the best. That's not a great way to invest because there tends to be a cyclical nature. What did better last year doesn't necessarily mean do better this year. And in fact, when something's relatively underperformed, it's probably becoming a more and more attractive investment over time, right? Like when interest rates go up, the price of bonds falls, but bonds as an investment become more attractive. They're now paying higher yields. And so just because bonds had a lousy 2022, you don't want to be pulling your money out of bonds in 2024 because they had a lousy year a couple of years ago. They're now much better investment than they were in 2021 when you are more than willing to buy them. Don't chase performance. Okay, here's another principle. If you're not using an index fund, you'd better have a darn good reason. The data is very clear, especially after tax and in the long term, that indexes funds outperform active managers, whether those are active managers of mutual funds or people just picking stocks on their own. So if there's no index fund in the asset class you want to invest in, okay, well, maybe that's reasonable, or your 401k doesn't offer index funds. Okay, maybe that's reasonable. But otherwise there really isn't a great reason to not use an index fund. Another important principle is to stop playing when You've won the game. Investing is a single player game. The goal is to reach your goals. You win if you reach your goals. It doesn't matter if you beat the S&P 500. It doesn't matter if you beat your brother in law. Nothing matters. You don't have to beat the market. All you need to do is reach your goals. So as you get close to your goals, maybe you can dial the risk back a little bit. You don't need to go to 100% cash or anything, but don't take risk you don't need to take to make money. You don't need to impress people you don't care about. All right, here's another principle. Be careful adding new asset classes to your portfolio. When do we get all inspired to add a new asset class? Whether it's real estate or whether it's Bitcoin or whatever it might be, small value stocks, emerging market stocks, who knows? When do we do that? Well, we're humans. We do it after they've done really well. And so what often happens is as soon as you add a new asset class to your portfolio, it does poorly for the next few years. This happened to me in 2007. I decided we're going to add real estate to our portfolio in 2007. Right? You can imagine how great that timing was. So we added the Vanguard REIT index fund. Subsequently, in 2007 and 2008, it fell. That initial investment fell 78% in value. 78%. 4/5 of every dollar we put in there disappeared. Happens all the time when you're adding new asset classes to your portfolio. Now we stuck with it. We still have real estate in our portfolio and 20 years later, we've done just fine. Right? Not only that money that lost 78% come back, but lots of other money that we added over time has done just fine in that portfolio in that asset class. But be careful when you're adding new stuff. Make sure you're not performance chasing. Another principle. Rebalance your portfolio every now and then. Right? The data is not entirely clear of how often you should rebalance, but it suggests that you don't need to do it any more often than once a year. But you should do it every now and then, right? Rebalance back to your original percentages so the risk you're taking on stays about the same. Okay? Another principle is there are many roads to establishing a successful investment portfolio. There are many roads to Dublin. You don't have to have a perfect portfolio. It doesn't have to Be the same as anybody else's. You just need good enough and you need to stick with it in the long run. Okay, here's another one. There's an old joke about the economist that's walking with his students who points out there's a $20 bill on the ground. The economist doesn't believe it, says it can't be there. That wouldn't be efficient. Well, every now and then there is a $20bill lying on the ground. Go ahead and pick that up. All right. It's not going to be there for long, but there will be a few times in your investing life and maybe a little more frequently in your business life while you run into a sort of situation where there's just a free lunch sitting there. Go ahead and take advantage of that. I mean, do your due diligence, but don't wait too long. Sometimes there is some free money out there. Maybe it's a property being sold by Busy Air who doesn't know or care what it's worth. Maybe somebody wants your house or your boat more than you do. Who knows? But just like there's really bad deals out there, sometimes there's really good ones too. Another important principle is to stay the course both in bull markets and bear markets. I find that beginner investors really struggle in the bear markets, but intermediate investors often struggle in a bull market. They say, how much longer can this last? I better sell now. And they miss the last six months or a year or two years of a bull market. A successful investor stays the course both in bull and bear markets. Okay, don't mix investing in insurance. You usually end up with inferior insurance and an inferior investment. Lots of weird, complicated annuities and cash value life insurance. The agent's going to tell you it's not an investment, but invest in it. Believe him when he tells you it's not an investment. It isn't. Another principle, use retirement investment accounts and your money will grow faster because it's not getting taxed as it grows. Whether it's a Roth account, whether it's tax deferred account, use them preferentially over a taxable account. You also get a couple other benefits. It's easier estate planning. You can just name a beneficiary, it stays out of probate and it can be stretched for 10 years by your heirs. Also, you get significant asset protection in every state from at least some types of retirement accounts. And you know, if you get in a terrible situation, end up declaring bankruptcy. It's nice to be able to keep some of your assets. Don't let the tax tail wag the investment dog. A lot of people make this mistake. They start worrying about taxes and they try to figure out how to pay less in taxes and they end up giving more than they're gaining by doing so. So consider the investment first, then look at the tax consequences. Remember that it isn't just your returns that compound. Compound interest also works on your costs and the costs matter. So pay attention to your fees, pay attention to what you're paying for advice. And remember, those compound over time as well. Simplicity is valuable. It's been called the majesty of simplicity. You don't need complicated portfolios. Some of the most sophisticated investors I know have used a one fund portfolio. It might be a life strategy fund or a target retirement fund or another balanced fund. You don't need 28 different mutual funds, 34 individual stocks and 800 individuals municipal bonds in your portfolio. It can be much more simple than that and be still very sophisticated and very successful. And finally, I want you to remember that the investor matters more than the investment. Your own investing behavior is a big determinant of your investing returns. If you want to see the enemy of your investments, look in the mirror. Stick with your plan. Get a written plan. Stick with it. And don't take too much out in retirement each year. Avoid performance chasing, avoid greed, avoid fear. All that is going to matter a whole lot more than a few basis points in extra fees. All right, I hope that's helpful to kind of go over some of the basic principles you need to understand to be a successful investor. The hosts of the White Coat Investor are not licensed accountants, attorneys, or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.