Want the principles of good investing explained simply?
Well, it doesn't get simpler than a single sentence. Here's my latest attempt, with a distinct nod to the late John Bogle:
“Performance comes and goes, but costs are forever.”
Of course, I'll have to explain this just a bit further.
There's a ton of well-respected research whose conclusions demonstrate that fees are a crucial component of long-term returns for investors.
Minimize fees, maximize returns.
However, to be fair, there's also research showing that the disciplined, factor-based approach of Dimensional Fund Advisors, or DFA, is actually worth its higher costs.
While DFA charges more--and only sells their funds through an approved financial advisor--history shows that their funds generate good enough returns to beat a similar Vanguard index even after you take costs into account!
But are any of these advisors near you? And more to the point, would any of them be willing to accept you?
If you have less than $100,000 to invest, the answer may be 'no,' based on my own results from the 'find an advisor' tool on the DFA website.
Some of the advisors listed "near me" (~100 mile radius, as far as I can tell) don't specify a minimum. But one listed a minimum of at least $100,000 to invest. Two more listed a minimum of $250,000, three listed a minimum of $500,000, and one listed a minimum of $1,000,000.
This is not based on your total net worth. This is based on how much you have available to invest. If you want to purchase DFA funds but you don't have a spare six figures lying around, you're probably out of luck.
So we're back to square one: how should an average joe, or early-career person, invest?
The easiest answer--and the best-supported one--is to invest in broadly-diversified, low-cost index funds.
Here's a chart I made of the S&P 500 returns from 1970-2019:
And here's a chart showing how major events in history affected the Dow Jones from 1896-2010:
It's hard to go wrong with a total-U.S.-market index fund. Better yet, include a total world index fund and a total bond market fund. Maybe also put some money into a REIT.
D'oh! Keep it simple, there, Froogal Stoodent!
Okay, simple...it's hard to go wrong with a low-cost target-date retirement fund. Figure out what year you turn 65, and find a target-date retirement fund nearest that year [e.g. Vanguard's Target Retirement 2050 Fund, or VFIFX].
Whatever funds you pick, try to keep the expense ratio, or ER, below 0.50%. Yes, that's one-half of one percent. The closer to zero, the better--I've found some very good funds with an ER of 0.10% or below. Vanguard, Fidelity, and Charles Schwab are good sources of high-quality, low-cost index funds.
Want more detail? Here are a few resources:
- Read about how to turn $10,000 into $125,000,000!
- Wondering what are the best-performing asset classes in American history? I've done some digging, and provided details here.
- Looking for the wisdom of an industry veteran who has nothing to sell you? Smart choice! I interviewed Paul Merriman in December 2020, and posted the full interview here.
- If you're pressed for time, here's an abbreviated version.
- Don't get blinded by greed.
- And recognize that we've seen some pretty miserable stretches before, including the Long Depression of the late-1800s to early-1900s.
It's a smart move to start investing for the long-term, but you'd be wise to be cautious. Don't go all-in, because the market sometimes drops. Drops fast and hard. You never know how you'll react until you've had money in the market while that market plunges.
Consider what could go right. But also consider what could go wrong.
Stocks, bonds, real estate. U.S. or international. Figure out which of these asset classes you want, and in what proportions. Or just buy a target-date fund, as described above.
And whatever you choose...mind those fees.
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