Investing Is Simple, But Not Easy
Warren Buffett has said that “investing is simple, but not easy.”
In my bestselling book Millionaire Teacher, I explain the effectiveness of simple investing. And I want to continue that theme by discussing my own money.
I own just three low cost index funds:
- A total U.S. stock market index (ETF)
- An international stock market index (VEA)
- A Canadian bond market index (XSB)
You see. My account is simple. And it’s well into seven figures. But large accounts don’t have to be complicated.
The hard part about investing is trying to ignore the investment media and your own instincts. Our gut reactions, unfortunately, usually hamper our money’s potential.
On October 20th, 2011, I wrote a post about my personal money, Millionaire Teacher Sells $50,000 of Bonds.
I didn’t view bonds as overpriced. In fact, I had no idea whether they would rise or fall. And I didn’t care.
My investing method is simple enough for a fifth grader to follow. I have 40% of my portfolio in bonds, and 60% in stocks.
I only ask one question when I’m about to invest money: Have my bonds risen beyond 40% of my total?
- If the answer is yes, then I buy stocks.
- If the answer is no, then I buy bonds.
Most people do the opposite. They prefer buying what has recently risen. This is why Buffett says that investing is simple, but not easy. Our instincts lead us astray. We feel good about buying things that have recently become more expensive.
On October 20th, 2011, my bonds represented far more than 40% of my total portfolio.
The green line below represents the world stock index.
It started falling in late July, forcing my stock allocation below 60% of my account’s total value; consequently, I ended up with a percentage in bonds that exceeded 40% of the total. So when I had fresh money to invest, I bought the U.S. stock market index. At the time, I had more money in the international index than the U.S. index, so I wanted to even things up.
You can see that the world’s markets (the green line) had dropped 15% in less than one month.
I wrote about my U.S. stock index purchase in the article, The Power of Rebalancing During a Volatile Market.
Have a look at the blue line.
It represents my bond index. When stocks fall, people usually put money into bonds. You can see that the bond price rose as people redirected their money into “safety.” They bought what was rising (bonds) and shunned what was falling (stocks).
I do the opposite.
Investing is simple, but not easy, because many people find it frightening to rebalance their assets. Buying a falling asset class frightens them. But it shouldn’t.
Have a look at what happened to the U.S. stock index since October 22, 2011:
Including dividends, it rose 23%.
Meanwhile, my Canadian bond index dropped 1.7% after I sold $50,000 worth.
This might be the sort of thing that whets the appetite of short term thinkers:
- I sold bonds, and then they fell in price
- I bought stocks with the proceeds, and they rose in price
This $50,000 rebalance juiced my account more than $12,000.
But it’s the long term that you should be more interested in…especially if you’re young.
I really wanted the stock markets to continue falling. After all, I’m a collector of stock market assets, and I won’t be selling them for at least another 20 years, because I’m still a relatively young man. Collectors shouldn’t celebrate if the prices of the items they’re collecting actually rise in value. That would be crazy.
Who wants to pay more for the things they’re collecting?
If the markets had fallen further, I would have sold more bonds, just to ensure that I had my desired allocation: 60% stocks, 40% bonds.
Predicting where the markets are going to go (or predicting the world’s economic direction) doesn’t interest me.
Successful investing is far simpler than that. But for most people, it isn’t easy. Fear and greed can, after all, be tough to control.
In a couple of days, I’m going to invest more money. Can you guess what I’ll be buying?