My method of investing is one that I could teach a fifth grader in an afternoon.
And that kid could go on to beat more than 90% of professional investors over a lifetime. After taxes, this strategy will beat even more than that.
You can read all the finance magazines you want, study all the newsletters you want, read all the economic news that you want, or research all the companies you want. It won’t matter. The odds are about 1 in 10 that you’ll beat (over your investment lifetime) a simple, low cost diversified basket of index funds. After taxes, the odds are probably about 1 in 12.
At the end of January, I got paid. So the big question was, “Where should I invest my money?”
I own three index funds. Here’s the financial breakdown that I aspire to:
- 40% short term Canadian government bonds (XSB.TO)
- 30% total U.S. stock market index (VTI)
- 30% first world international stock market index (VEA)
When I ask my hypothetical 5th grader (after that fabulously hypothetical afternoon I spent teaching him) he says:
“Do you still have the same percentages in each of your funds, after the markets have moved a bit?”
I check my holdings and realize that….no, I don’t.
Over the past month, my bond index dropped 0.04%, my U.S. stock index gained 3% and my International stock index gained 2.7%.
The fifth grader pulls through:
Guiding me, the fifth grade finance kid says, “Buy the bond index. It hasn’t done as well.”
Ahhh, that kind of logic warms my heart.
When I went to make my monthly purchase, I noticed that bonds only made up 38.5% of my investment account. I wanted them to make up 40%. So I had to top them up with the fresh money.
What would the average investor do?
Most investors would do one of two things:
1. They’d look at forecasts to see which of the following indexes (bond, U.S. stock, International stock) was likely to rise or fall over the next short while, and they’d base a purchase decision on that information.
2. They’d buy the highly performing stock index (in this case, the U.S. market index)
Both choices would be silly.
By mechanically putting fresh money into whatever index is lagging behind, I’ll be paying slightly lower than an average cost over time, for each index, and I will beat the vast majority of the professional investors.
They’ll sweat away trying to figure out what to invest in, while I’m travelling, hanging out with family and friends or enjoying some sporting activity.
And most of them will lose to me…badly.
It hardly seems fair. But I’m not complaining.