The Ten Commandments of Investing

It isn't rocket science

To help guide your investing strategy and maximize your lifetime net worth, here are my Ten Commandments of Investing (okay, I’m up to thirteen).

1. Costs matter.

Small differences in investment expenses add up to large reductions in your long-term net worth. Incurring annual fees of "just" 1% — for mutual fund expenses, financial advisors, 401K frictions, or anything else — over 40 years will shrink your net worth by nearly 25%. That’s not a typo.

Minimize your investment expenses.

2. So do taxes.

Maximize tax-advantaged accounts including all the usual ones — 401Ks, Roth IRAs, 529s, HSAs, FSAs, etc. And, you can do more — sell your “losers” every year (i.e, tax-loss harvesting of unrealized losses), put bonds in your retirement accounts (they have less favorable tax treatment than stocks), save your HSA money until retirement, do timely Roth IRA conversions, save via back-door Roth IRAs, etc.

Pay no more investment tax than is legally necessary.

3. Diversify.

The only way to reduce investment risk without reducing expected returns is through diversification. It’s simple to do with a total stock market index fund.

This magic trick is effortless and costless.

4. Asset allocation is key.

This is the mix of stocks, bonds, cash equivalents (i.e., savings, CDs, money market funds), and any other asset classes such as real estate that makes up your investment portfolio. Stocks are riskier than bonds, bonds are riskier than cash, and commercial real estate falls somewhere between stocks and bonds.

An optimal asset allocation ensures you have the right level of investment risk for your life circumstances — age, income, savings, goals, risk tolerance, etc. Generally, younger and higher income people should be more equity-weighted (they have the luxury of both a high income and a long time horizon), while the opposite is true for older and lower income investors.

Crypto, metals, commodities, private equity, private credit, hedge funds, and venture capital are other asset classes with somewhat different risk/return and liquidity characteristics. In my view, none are well-suited for individual investors.

Be mindful of your asset allocation and then find something else to angst about.

5. Keep it simple.

Quantum mechanics is mysterious and counter-intuitive, investing isn't. A simple and boring strategy can be better than a complicated one because (a) you're more likely to understand and sustain it and (b) it more easily satisfies points 1 through 4.

Target date mutual funds for retirement accounts are an example of this — they're hands-off and auto-adjust — as are stock and bond index funds. (See my next point.)

Complex financial products benefit the salesperson, not you. You can be certain that the bells and whistles that you don’t understand are not there for your benefit. Instead, you’re likely being bamboozled with BS or cleverly disguised fees.

6. Mutual funds are helpful.

401Ks use mutual funds as they satisfy my previous points. Forget about buying individual stocks; low-cost mutual funds are a better solution. They’re professionally managed, available in every asset class, designed for individual investors, and diversified.

7. Don’t just do something, sit there.

If you’ve followed the previous six points, there’s not much else to do other than to leave things alone.

When the stock market makes you jittery, try to do nothing as it will likely make things worse. One way to do this is to uninstall the investment app from your phone and not check your balances.

8. Don’t let emotions rule your decisions.

Keynes spoke of “animal spirits” driving irrational investment behaviors. Many others have observed how fear and greed cause investors to make poor choices. Whatever framing you choose, be aware that emotions have a powerful (and usually negative) effect on your investment decisions.

How do you mitigate these emotional triggers? It’s not easy — one approach is to hire a financial advisor to insulate yourself from your own irrationality, another is to pay attention to my previous 7 points in this note.

9. Lunches are never free.

Other than diversifying, there's no way to get higher returns without taking on more risk. (See #3.) That's as true as gravity.

We all want the high returns of the stock market combined with the safety of a bank savings account but that's not how things work — as with many things in life, you can have either but not both.

10. Market timing is for fools.

So-called technical analysts try to divine the future stock price movements by "analyzing" past stock charts, sun spot cycles, or retrograde orbits. As with palm readers and astrologers, they’re neither technical nor analytical, but they can be a fun diversion.

Another challenge of marketing timing is that, as I like to say, you need to be right twice — when to get out and when to get back in. Good luck with that.

No one knows what the future holds in the stock market or in life. The best time to invest is when you have the money. (See next point.)

11. Make compound interest work for you.

The power of compound interest can be your best friend (when investing) or your worst foe (when in debt). Make it your friend.

Consider the difference between 5% (bond returns), 10% (stock returns) and 20% (credit card interest rates). When you start with $100 and leave it alone for 20 years:

• at 5%, it becomes $265

• at 10%, it becomes $673

• at 20%, it becomes $3,834

Earn 10% rather than pay 20%.

12. Keep your foolish hunches to a minimum.

We all have hunches. Maybe health care stocks are a winner because you just had an expensive medical treatment that saved your life, or you love your Tesla, or your nephew made a killing with crypto, or you think SpaceX stock will go all the way to Mars, or you’re piling on to the latest meme stock on Reddit. If you can’t resist the temptation, then limit these “investments” to less than 5% of your overall net worth.

If your hunch is a bust, it will be an affordable lesson.

13. If it sounds too good to be true, it is.

When an investment opportunity seems to good to be true, it always is. That's your signal to take a hard pass.

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Now that you know my thirteen commandments of investing, you can be a wolf on Wall Street.

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