Remember it is not all about money. There are many other important things. Money is important but not the most important. After what do we take when we leave this earth. Think of this always.
1. Fear is the emotion that leads us astray while we invest. Greed is actually a byproduct of fear: fear of losing out, fear of not having enough, fear of not doing as well as everybody else. If you invest based on what your emotions say you should do, you will usually lose. You have do the opposite of what your emotions say you should do. As Warren Buffet says, “Be fearful when others are greedy, and be greedy when others are fearful.”
2. Realise that you are powerless over the market. Keep your aims reasonable and low and not very high. High goals will tempt you to high risk investments and you can lose a lot and never gain them back.
3. You have to be patient. A tree does not grow in a day. Your goal should be to harvest positive returns flowing from global capitalism and not frantically trading or fearfully investing in T-bills.
4. Do not panic or be elated over short-term market events. Take them both in your stride and remember the wise old saying, “This too will pass”.
5. Don’t invest in a company because it looks sexy or cool or makes you look sexy or cool. Usually these are expensive and overvalued and you are more likely to lose money and not gain money.
6. Control what you can. These are the following: having a financial plan, asset allocation, diversification and investment expenses and fees.
7. Do not pay attention to investment media. They feed your emotions-fear and greed. They do not help you reach your goal of investing: maximizing your lifetime state of wealth.
8. Pay attention to your investments. No one but you can take responsibility for them. If you leave the responsibility to others, chances are that you are being used to further their profits. You can use a financial adviser but the responsibility is always yours.
9. Irrespective of high your net-worth is, do not invest in advanced investments that the financial market profits from and not you.
10. Do not go and buy the stock of a company because some hot news says that this company is going to become hugely successful. You cannot beat the market by stock picking. Do you know something the market does not?
11. Do not think that because you have your money invested with a so-called great person or great institution, you are safe.
12. Do not subscribe to market newsletters. If they can beat the market, why should they tell you? Why can’t they invest the money themselves and make a bundle?Do not believe the TV pundits. Again if they can beat the market, why let the world know? Warren Buffet does not go around saying what he is in investing in or what he is going to invest in. All opinion pro and con is already built into the price of equities today. If anyone was a genius to devise a market beating strategy, he would not share it with you.
14. The whole field of technical analysis has its advocates, but in real-life it does not work. Do not waste your time in it.
15. Buying top performing stocks and mutual funds does not mean they will continue to do well and you will beat the market. The slippage cost, transaction costs and taxes all add up and even if you profit, these things will make your profit disappear.
16. Short-term market timing does not work. Do not bet your life savings on it. Trade as infrequently as you can.
17. Programmed trading systems, stock tips, or leverage will usually make you poorer and not richer. Do not follow fads.
18. The rules of how to invest are: simplify, diversify, invest passively and consistently, emphasising the tried and the true, reduce expenses and taxes and buy and hold. There is no time that is different, no new order, new model, new normal or new economy. There is no new anything. Although many investors have advised a slice and dice portfolio, even these portfolios may not outperform in the future. Monitor your performance and know what your risk tolerance is( it is how much you are willing to lose, not how much you want to gain)
19. Owning a market cap weighted fund/ETF of all publicly traded global assets like Vanguard’s Total World Stock Index ETF or ishares All-Cap World Index Fund might be a good idea if you can really stay the course for three or four decades. Plan for the worst scenario you are likely to face and see whether you will still stay the course before you adopt a financial plan.
20. Buying small-cap stocks, value stocks and low beta stocks offers a higher chance of outperforming the market. Low beta stocks are in the following sectors usually: Consumer staples, Energy, Utilities and Health Care. Overweighting these stocks will give a higher return for lower risk. Diversify globally, when you can. Portfolios that do this are called tangent portfolios. You can view some do-it-yourself tangent portfolios here or go this website. Some data regarding these portfolios are shown below:
21. Funds that you can use for the bond part of your portfolio are:
- ishares Barclays 3-7 year Treasury Fund(IEI)
- Barclays Intermediate Treasury Fund(ITE)
- ishares Barclays TIPS Bond Fund(TIP)
- ishares S&P national Municipal bond Fund(MUB)
- Market vectors Intermediate Muni Fund(ITM)
- Vanguard Total US Bond Market(BND)
- SPDR Barclays International Treasury Bond(BWX)
Put atleast 50% of your bond allocation in US government bonds.
22. Low beta sector funds are shown in the figure below:
23. Small value funds are shown below:
24. Tangent portfolio allocations are shown in the figure below:
25. Do take your career into account when taking risk with these portfolios. If you have a stable career you can take more risks.
26. Use a cheap broker to buy your funds.
27. If you do not have these funds in your tax-deferred retirement plan use closest approximation.
- 20% downside risk: 24% S&P 500 and 76% bonds
- 25% downside risk: 36% S&P 500 and 64% bonds
- 33% downside risk: 47% S&P 500 and 53% bonds
28. Rebalance the portfolio periodically when the underlying positions get significantly out of alignment. In normal circumstances, rebalancing once every 3 years is plenty.
29. Keep your education and contacts up to date so that you do not become out-dated.
30. Go to college and get some knowledge. Use your time productively in college. majoring in engineering, computer science, business and the health professions will give you more money than other fields in most situations. Mastering essential and difficult skills is what will give you money. This means math and science, writing and presenting well and knowing how to work with computers. Go to graduate school if you want to get a high paying job.
31. The sooner you know what you are going to do and the more hours you put into doing it, the more of an edge you will have over others.
32. In the real world, a positive, co-operative roll-up-your-sleeves attitude is better than criticising.
33. Do not spend your time with the losers. Spend as much time as possible with the type of people you want to be like,
34. Do not indulge in drugs or alcohol.
35. Ideally your career should be in that little sweet spot where the three circles overlap: your passion, your talent and the market. If you want to make money, work in a field where the money aggregates. Work in a field where people are dependent on you. Be the best that you can be in your field. Work for a person whom you admire. Remember that the world does not owe you a living. Work is a privilege. Work contributes towards making the world a better place and protects you from meaninglessness and insanity.
36. You need to go the place where the action is, if you want to make it big.
37. Sell yourself. Work hard. Make yourself indispensable. Have excellent work habits. To choose excellence is to choose a life of hard work. There is no other way to do it.
38. Make good first impressions. Mind your manners. Do not be self-obsessed. Be on time. Send thank-you notes. Don’t use profanity. Don’t brag or show off. Don’t talk about politics or religion, your diet or what you had for lunch.
39. Do have integrity and be a person of good character. Don’t break the law, tell the truth, keep your word and take responsibility for your actions. Have intelligence, energy and integrity.
40. Don’t count on life being fair. The real world is unfair. People like to be around good-looking people. Men do better than women. Ageism exists – being older is a disadvantage. Nepotism/favouritism exists – whom you know matters more than what you know.
41. Use your time wisely. Spend your time developing yourself by studying and staying abreast in the latest developments in your field.
42. Read the wall Street Journal everyday if you are in the money-management business.
43. Do marry and stay married to a sensible person, if you can find one.
44. Children today are luxury goods. They need a lot of money to keep up. If you can maintain them with less money and get them through life, count yourself lucky.
45. Err on the side of oversaving than undersaving. Be well insured. Protect your assets from creditors, law suits and evil ex-spouses.
46. Do not shop to stave off loneliness or to buy self-esteem. Do not bank on that big future payoff. Do have a reserve fund. Do pay your taxes. Don’t borrow money, except to buy an appreciating asset.
47. Do buy a home once you are ready to settle down( if you are going to stay in that place for five or ten years). Start saving for your downpayment as soon as you can. Do not overpay for your home. Do not buy into a red-hot real estate market. Do not buy so much house that you become house poor. The money tied up in the property is illiquid. Unless you have a comfortable margin of safety that allows you to put food on the table, you will sleep better if you rent. Take a fixed mortgage rate and not a floating one if possible. Do avoid redecorating insofar as possible. Do not buy vacation homes. Rent one when you need it. Do be realistic about how much your house is worth when selling. A house has no intrinsic monetary value apart from what someone is willing to pay to rent or own it. Don’t trade in and out of houses often. The people who make money in residential real estate are those who bought something 25 years back and held on to it for 25 years.
48. There is no such thing as a safe withdrawal rate. the safe withdrawal rate is zero. The tangent portfolio somewhat-safe withdrawal rates are as follows in the below figure:
You can use this website-www.quantext.com to calculate safe withdrawal rates on an ongoing basis. Recalculate your withdrawal rates every 5 years.
49. Do postpone retirement as long as possible. the safest time to retire is never. You can move to an area with a lower cost of living to have a higher standard of living. You can take an immediate inflation adjusted annuity to convert your nest egg into the maximum amount of income, but the longer you can put it off and the higher the interest rates are, the higher will be your payout ratio. Don’t take out a reverse mortgage except as a last resort. Save as much as possible. Do not take Social Security right away as soon as you are eligible. It often pays to delay. Don’t blindly accept a lump-sum payout from your pension plan. Do you homework and see what you will get if you immediately invested it into an immediate annuity.
50. Do have a will and all the legal apparatus you need to give things in good order to those left behind. Do consider tax-saving estate giving strategies. Do tell your survivors the who, what, where, when, and how of your financial empire. Don’t start a family foundation unless you are as rich as Bill gates. Get the highest yield as possible as you can on your cash balances.
notes from the book ” The Little Book of Bulletproof Investing”