This week’s learning is part 4 of a 5 part series on Personal Finance and Investing inspired by 3 books – The Investors Manifesto by William J Bernstein, I Will Teach You to Be Rich by Ramit Sethi, and The Millionaire Teacher by Andrew Hallam. (Part 1, 2, 3)
The only known reliable long term investment strategy is investing in index funds.
What are index funds? Index funds are computer managed funds that are a representation of the whole market. If you own the index of the whole stock market for example and Apple’s value is 3% of the stock market, 3% of your index will contain Apple’s stocks.
The assumption behind indexes is that while individual stocks may go up and down, the whole market will grow in the long term (for the US stock market in the last century, growth has averaged around 8% per year and for the US bond market, this number is around 4-5% (subtract 2-3% inflation for real return))
How do you set up a portfolio? Your portfolio needs to have a collection of stock and bond indexes. Stocks are the source of long term growth but are volatile. Bonds have slower growth but will help you sleep peacefully at night.
– Your bond allocation % should be around your age (the older you are, the less risk you take)
– Keep your portfolio split VERY simple. Reduce overhead – aim to rebalance only once every few months
How do you keep investing and balance your portfolio?
– Make investing a purely mathematical exercise – decide your allocation and stick to it
– Imagine you have 30% bond, 70% stock allocation and your your stock allocation has gone up to 80% of the total in the past month/year – invest your money in bonds to bring the ratio back to 30-70
– Don’t worry about the markets. Just keep buying low and sell when you need to
Sketch by EB
Derek Sivers, founder of CDBaby.com has followed Bernstein’s methods ever since he sold his company for $22 million. Derek’s advice is as follows – Think very very long term i.e. 20-40 years. Your labor and active businesses are the only way to get rich. Investing is so you will have enough when you retire.
Bill Bernstein’s Book recommendations –
– Psychology – Your money and your brain by Jason S
– Business – Common sense on Mutual funds by Jack Bogle
Next week, we round all of this up with the final learning of the series.
A Learning a Day 