San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, October 16, 2015

Investing In One Lesson

I was reading the issue of Forbes in which the world's richest people are listed the other day.  As I looked through the list of people who are worth billions and billions of dollars it occurred to me that many of them have one thing in common.  It wasn't true all the time but it was true more often than not.  Can you guess what the world's richest billionaires share in common?  Answer:  Many of them are lifetime buyers of stocks.
Average people like you and me need some means to build up a nest egg for our futures.  Is it possible to mimic the investment behavior of the rick folks and become lifetime buyers of stocks?  I believe that it is. Furthermore, I believe the problem most of us middle class investors have has nothing to do with our investment strategy and everything to do with our emotional inability to carry it through.  Simply put, most people are far too fearful to commit themselves to a stocks only investment plan, especially when the market inevitably goes through one of its many down periods.  That fear is what keeps so many people from ever becoming members of the top 1% of the net worth population.
If you want to become a member of the top 1% of the net worth population you can do so, providing no cataclysmic event like an asteroid falls from the sky and crushes you takes place.  All you need to do is commit yourself to a lifetime of purchasing stocks, or stock mutual funds.  Today's blog post may be the most important one I have ever written if you are serious about building up a nest egg.  So, without further ado, I present my one investment lesson that, if followed, can make you financially independent.
Buy stock mutual funds early and often.  Keep buying shares of stock mutual funds your entire life.  Given a choice between spending money on a consumer good or investing into a stock mutual fund, chose the stock mutual fund.  Make this a habit throughout your entire life.  Do not stop buying shares of stock mutual funds until you have a nest egg large enough to provide for your income needs. Then you may start selling them in order to pay your bills in retirement.   Why do I say this is the one rule of investing you must never forget?  Look at the graph below:

Over the long term stock funds outperform all other asset classes.  You will, by definition, be investing over the long term.  If you start investing when you are 25 years of age you will have a life expectancy of 55 more years.  The most important investment decision you will ever make is not what ratio of your assets to place into the various asset classes.  The most important decision you will ever make is to place all of your investment assets into stock funds.  Look at the graph below.  Unlike the graph above it is not set to a logarithmic scale.  You will notice that the stock fund investments go through powerful up and down markets.  The fear generated during those down markets is precisely why almost nobody can commit to stocks only for their lifetimes.  You will also notice that there is no comparison in total return between the various asset classes.  Despite the fluctuation in value in stock funds, they are the only investment that will deliver a real return over the long term.  Fearful of having their portfolio decrease in value from $300 to $175 during a market downturn, most investors will place their funds into asset classes that are worth the staggering sum of $15 when the stock market is at a bottom but that allowed them to not lose any money while the stock market tanked.  They brag about how much money they did not lose while ignorant stock fund investors complain about their loss of $125. Meanwhile, nobody is looking at the big, comparative picture.  The stock fund investor, even after the bloodbath in the stock market, has 12 times more wealth than the bond/CD/fixed annuity/cash investor.  Look at the period from 1998 through 2002 below to see what I mean. 

Many investment advisers are smart enough to know that stocks are the best investment vehicle in the world.  But they also know that selling terrified investors on the merits of a stocks only investment portfolio is almost impossible.  So what do they do?  They compromise and come up with some allocation of the investment portfolio that allows the investor to hold both stocks and bonds.  That is a very bad decision.  Look at the graph below.  Note that the graph below is on a logarithmic scale.  The decision to allocate any portion of your investment portfolio to bonds, ostensibly to reduce volatility and eliminate fear during bear markets, is downright dumb.  Why should you accept lower returns just to allow yourself to feel mildly better when the stock market is tumbling?  Answer:  You shouldn't.  Commit yourself to be a lifetime buyer of stock mutual funds and nothing else.  Don't stupidly dilute your overall total return just to be able to feel mildly better about yourself during a market downturn.  That short term feeling of superiority will eventually be replaced with despair in the long term when you realize how much money it cost you to feel just a little bit better in a down market.

What sorts of returns can you expect as a lifetime buyer of stock mutual funds?  Look at the chart below for the answer.  This chart shows you the average annual rate of total return for stocks for every rolling five through twenty five year period from 1992 through 2013.  I selected this time period to be able to include the second and third worst bear markets in the history of the stock market.  Those bear markets took place in 2000-2002 and 2008-2009 when the stock market dropped 49% and 57%, respectively.  Those bear markets kept millions of people from investing in the stock market, thus depriving themselves of stellar returns and hefty net worth balances. 

There is no secret to building a million dollar portfolio.  Building a million dollar portfolio does not require perfect market timing.  Nor does it require perfect asset allocation, unless you mean being 100% in stocks 100% of the time.  The secret to building a million dollar portfolio is to commit yourself to buying stock funds early and never changing your mind, no matter how scary the stock market might appear.  It means buying when others are selling and buying when others are buying.  It means buying, buying and more buying.  It does not take a lot of money.  Your average hourly wage slave can accomplish this goal if he commits himself to buying early and often.  This truth is not hard to prove, nor is it hard for anyone of average intelligence to understand.  Still, it is almost impossible for the average person to do because the average person is driven by his emotional reaction to the stock market as opposed to his rational apprehension of what the stock market can do for him.  For that select few who can commit to being 100% in stock mutual funds 100% of the time, the future is bright.  Bets are off for all others.  They will likely fall prey to some fast-talking investment scammer who manages to convince them that he has found the secret to timing the market and never experiencing any losses.


  1. Welshy,

    You and my mama are made from the same mold. She had me investing from the time I had my first job, working for an organ grinder. I was barely old enough to swing from a vine when she had me buying stock in Chiquita. I eventually owned a good chunk of Chiquita and Dole. However, after a big freeze wiped out an entire banana crop one year, I realized the importance of a good stock mutual fund for diversity. With as often as my hairy little wife Mata washes her hair, I thought it was also a good idea to buy Vo5 stock. Working for A.P.E has always given me enough income that I could max out my IRA, Roth IRA, SEP IRA, and my BVDs.

    If I wasn't having so much fun being a secret agent I'd be ready for retirement.

    Lancelot Link

    1. Mr. Link:
      Good to hear from you although I resent your assertion that my mama was either an ape of an old piece of bread. I do remember the good old days when a child could go to work without running afoul of the government's rules on child labor. You are a perfect illustration of why it should not be forbidden. Your hard work has allowed you to create a simian financial empire, although I am sorry about the Bovine Viral Diarrhea you "max out."