Top-earning Wall Street/Bay Street bankers make in a week what the average dentist earns in three years. Yes, “in a week” versus “in three years”—this is not a misprint or a typo.
Furthermore, investment bankers budget millions for fines related to their misbehavior, much like you and I budget for groceries, rent, or holidays. But how do they misbehave? They engage in market manipulation, insider trading, providing misleading information about securities, omitting crucial information about securities, stealing customers’ funds or securities, and other activities that harm investors if left undiscovered.
Who pays for these outrageous incomes and exorbitant fines? Look in the mirror. It could be you.
But does it have to be you? Can you avoid being on the hook? Can you make money in the stock market? Over the long run, about 90% of retail investors lose money.
An exchange-traded fund (ETF) that tracks the U.S. economy has been the best investment for over 100 years. While individual investments might occasionally outperform, nothing generally surpasses the U.S. economy. Yet, about 90% of retail investors still lose money.
So, what does an investor need to do to match the U.S. economy’s performance? There are six key principles to follow:
- Save: Without saving, the other five principles are meaningless.
- Be a do-it-yourself investor: It’s easier than most people think.
- Invest in the U.S. economy through an ETF: SPY is the top choice. Avoid individual stock picking.
- Buy and hold: Warren Buffett’s favorite holding period is forever. Avoid trading. The average holding period for a U.S. stock is now just ten months, contributing to why 90% of investors lose money.
- Asset allocation: Maintain about 50% in the market and 50% in cash or near-cash (like guaranteed investment certificates in Canada or Treasury bills in the U.S.). Ratios like 60/40 or 45/55 are also acceptable. The exact ratio is less important than having ample cash. When market movements disrupt your asset allocation, rebalance to your chosen ratio. Rebalancing accounts for the largest share of portfolio returns. Security selection and market timing do not materially contribute to returns, another reason why 90% of investors lose money.
- Avoid complexity: If you can’t explain an investment to a 10-year-old, don’t invest in it.
These six principles constitute rules-based investing, which is consistently effective. The alternative, judgment-based investing, is wrong at least half the time.
Would you drive knowing there is a 50% chance of an accident? If not, avoid buying individual stocks and timing the market.
Investing following these six rules requires very little time. “The best returns” and “very little time”—who needs more?
