Investing should be simple and efficient, if it is to be successful. This is the opinion of investors like Warren Buffett (Berkshire Hathaway 2015 Newsletter) and John Bogle (Vanguard Group - low cost index funds). The simple investing approach is the topic of a recent AAII (American Association of Individual Investors) Newsletter. This Newsletter is a supplemental publication to our AAII Journal, and like the Library’s subscriptions such as Kiplingers Personal Finance, ValueLine, Morningstar and others, is a valuable source of information for small investors and available in print and electronic formats from the Library.
According to the AAII, simplicity in investing encourages maintenance of a long term focus. Short term profit may be reduced but long term profit may increase due to a greater ability to stick with your investing plan, somewhat like sticking to a healthy diet. Simplicity means an easier to understand methodology that allows confidence and ease of management in times of market volatility, like the present. Warren Buffet says that he will not invest in a business he does not understand, nor would he invest without understanding and using a consistent strategy. Short term investment decisions are often determined by irrational thinking (fear and greed) or “bounded rationality” which is determined by limitations of knowledge, time, understanding and emotion which result in flawed investment decisions. Also, modern communications tend to information overload where too much information can be as much a problem as too little. Over analyzing situations may result in taking no action. The more complex the situation and the greater the number of rules, data, variables and choices, the more the individual investor is at a disadvantage to the professional.
One possible solution for the individual investor is the “Index Card Investing Strategy”:
Index Card Investing Strategy:
- Max your 401(K) or equivalent employee contribution.
- Buy inexpensive, well diversified mutual funds such as Vanguard Target 20xx funds.
- Never buy or sell an individual security. The person on the other side of the table knows more than you do about this stuff.
- Save 20% of you money.
- Pay your credit card balance in full every month.
- Maximize tax-advantaged savings vehicles like Roth, SEP, and 529 accounts.
- Pay attention to fees. Avoid actively managed funds.
- Make financial advisor commit to a fiduciary standard.
- Promote social insurance programs to help people when things go wrong.
It is interesting to note the similarities with Bogle’s investing suggestions:
Bogle argues for an approach to investing defined by simplicity and common sense. Below are his eight basic rules for investors (Common Sense on Mutual Funds).
- Select low-cost index funds (for cost efficiency)
- Consider carefully the added costs of advice
- Do not overrate past fund performance
- Use past performance to determine consistency and risk
- Beware of stars (as in, star mutual fund managers)
- Beware of asset size
- Don't own too many funds
- Buy your fund portfolio - and hold it (see Buffett)
The three-legged structure of financial security used to be a defined benefit pension, Social Security and personal investments including education and real estate. These have all come under economic pressures and exposure to market volatility, so good luck and keep investing simple, if you can.
Simple but not Simplistic Resources:
Financial Resource Guide Los Angeles Public Library
Value Line Investment Survey: Ratings & Reports
Pound foolish : exposing the dark side of the personal finance industry / Helaine Olen.
Ibbotson SBBI Classic Yearbook
The little book of common sense investing : the only way to guarantee your fair share of market returns / by Bogle, John C.
Common Sense on mutual funds / by Bogle, John C.
Hulbert Guide to Financial Newsletters
Research & Homework Databases
Morningstar Mutual Funds
S&P Capital IQ NetAdvantage Stock Reports
"As you simplify your life, the laws of the universe will be simpler; solitude will not be solitude, poverty will not be poverty, nor weakness weakness." - Henry David Thoreau