27 Tips from 15 Years of Investing

Hey Friends,

This week's newsletter is a little late. I thought I would make an easy video this week since I have been working hard on building a new platform for the Money Monk group coaching I've been talking about. I plan to have the registration for this coaching open in the next week, with the first live session on August 27th or 28th.

Unfortunately what started as an easy video of investing tips turned into 3 hours of commentary on investing and mindset (😂). So I have work this weekend to edit it down and turn it probably into multiple videos since most people prefer ~10 minute videos on YouTube.

But for the newsletter, I thought I'd share a list of a few of the tips that I talk about in the video(s) I'll be working on, and share them with you early.

Here are 27 wisdoms that I have picked up on over the years. All of these have been learned typically the hard way by myself - doing the wrong thing first.

These come from my own experiences moving from an active investor early on to a passive investor that manages my own portfolio. I hope they are helpful to you! I will have another list of tips out sometime next week focused more on selecting well-diversified, low-fee funds.

1. Work to resist the urge to gamble and understand the difference between investing and gambling. An investment carries a reasonable expectation to produce more money for you and has some way of creating value.
2. An investment could be a machine that turns a raw resource into something better, a rental house, or a business that is delivering value to customers. An investment is NOT a speculative gamble that depends on hype or convincing someone else that is worth more than what you paid for it.
3. The reason we don't want to gamble and take big risks is because you aren't just playing a single bet. You are making daily bets for the next 10, 20, 30 or more years. You can't afford to bet it all on one thing because the risk of a complete loss destroys the power of compounding your money.
4. Instead, start with a clear foundation for what you are trying to do when you invest. Ask these questions:
   1. How long will I invest?
   2. When will I need the money?
   3. How much do I need to earn to meet my goal?
   4. What is my tolerance for risk, and the risk of the investment?
5. You want to learn how to tune out the noise. The hot stock tip that appeals to emotions like greed or fear. Instead, refer back to #1 where you are focused on the qualities of an investment.
6. The most challenging part of investing is managing emotions. It does not require complicated math or being a "trader".
7. It is emotionally difficult to buy low and sell high. Why? Because typically when you buy "low" are during times of fear, when most people are saying it's a bad idea. It's also hard to sell high when everyone feels invincible.
8. It is emotionally difficult to simply do nothing in response to changing market conditions. But doing nothing and investing in a simple, easy to understand plan consistently and for a long time is the key to real wealth.
9. It is emotionally difficult to stick to a plan in good times and bad and to not change directions as market conditions change. Staying the course and consistency sounds easy but is hard.
10. It's hard to fight being greedy: fear of missing out on the next hot thing drives investors to make risky bets. Most end up failing. The problem is that we are blinded by "survivorship bias".
11. Survivorship bias is where we only see the winners. So if one person makes a risky bet and hits it big, we celebrate them. We don't see the 10,000 other people that made bets and lost it all. You have to understand the risk in each investment you make.
12. Most people assume - and the financial industry will encourage you - to be a more active trader. It is natural to assume that being more active will equal better results, but that is not the case. 90% of active investment funds fail to beat the market average over 15 years: https://www.spglobal.com/spdji/en/research-insights/spiva/
    1. And even the few that do beat the benchmark, will eat up any extra profit in fees.
13. The reason to passively invest: if the actively managed funds that manage $17 trillion of money that employs the top minds in finance, theory, and math, all fail to beat the average over the long-term, I have to have a big ego to believe that I can beat all of them.
14. Recency bias blinds us to risk: if we only look at recent performance, we will be continually chasing performance and buying high and selling low. It is better to stick to fundamentals and ignore the noise. To fight recency bias, use https://www.portfoliovisualizer.com/ to compare different investments over at least 10 years, and really 100 years if the data exists. That way you aren't blinded by a single year's performance.
15. Fees are underappreciated by most investors. The difference between an annual 2% fee and a cheap .03% fee from an index fund over 30 years is $500,000 in lost wealth in a scenario where you invest $100,000 and it grows with small annual contributions and an 8.5% interest rate. Compare the true cost of fees with this calculator: https://dqydj.com/fund-fee-calculator/
16. I hate AUM fees, which are "assets under management" that a financial advisor may charge. For instance, for someone managing your money for you they may charge a 1% or 2% fee on all your assets simply for the service. This has massive impacts on your long-term wealth performance.
17. Most of the financial services industry are fancy salespeople that are trying to get commissions and fees for selling complex products. Only 5-12% of financial advisors are "fiduciaries" which are required to act in your best interest. Always look for a 'flat fee fiduciary' if you decide to hire a financial advisor.
18. There are two primary forms of risk to be concerned with: 1) the risk of an investment itself. How much money can you lose, how long can it stay down, what has it lost historically. A helpful article that takes the last 100 years of performance helps describe this performance risk: https://www.fidelity.com/learning-center/investment-products/mutual-funds/diversification
19. The other form of risk is based on an individual investor. Your risk appetite, your ability to take risk based on how long you plan to invest, when you will need the money, and likelihood of life events that may change your plans like a job loss. Taking risk surveys can help shed light on your risk profile, Vanguard has one I like: https://investor.vanguard.com/tools-calculators/investor-questionnaire
20. Another way to think about risk is only take as much risk as you need to meet your goals. To do this, you need to know how long you plan to invest for, how much money you want at the end (or how much is "enough" for you), and how much you are able to contribute every month or year. From there, run a calculator that tells you the return needed: https://www.calculator.net/investment-calculator.html?ctype=returnrate&ctargetamountv=1%2C000%2C000&cstartingprinciplev=20%2C000&cyearsv=10&cinterestratev=6&ccompound=annually&ccontributeamountv=1%2C000&cadditionat1=end&ciadditionat1=monthly&printit=0#calresult
21. For instance, a 20 year old that can invest $300 a month for 45 years and wants a million dollars when they are 65 only needs to get a ~6% return on their investment. So they don't necessarily need to go make higher risk bets to meet their goal. Of course, a higher return might mean that you can get to your goal faster. But the trade-off is that higher-risk decisions prevent you from meeting a goal at all.
22. It is hard to realize you can't predict the future and know what company will do well. This is because of "hindsight bias". We look backwards at what did happen and say, "that was so obvious!" and make the mistake of believing that we can apply that to a future, unknown situation.
23. You can begin to prove that you can't tell the future by writing your predictions down like this:
    1. Be specific about what you think will happen, if something will "go up" answer "by how much" and "by when".
    2. After that prediction, then write down how much it will go up from there and for how long.
    3. After that prediction, write down when you will exit an investment down to the day.
    4. Finally, write down how much you are willing to bet on the play before it happens.
24. If you write these predictions down you can prove to yourself you can't tell the future. But we get tricked because we see the people that do make these gambles and are successful. The problem, is that again we only see the "survivors" that did this correctly. So we skew our belief of predictive abilities and misinterpret chance or blind luck for certainty.
25. Instead of betting on one company, the simple and efficient way to invest is by buying index funds. Index funds are the reason for more millionaires being made in the last 40 years than any other financial tool. It allows you to buy the "average" of all companies in the world, or the United States, or any specific area. This is the average that active investors fail to beat.
26. Here's how you can do this: look up "total U.S. stock market ETFs" which simply invests in all companies in the United States. My favorite is VTI, which is Vanguard's total stock market index. It's fee is only .03% (practically non-existent) and you have an immediately diversified fund of all U.S. companies.
27. If you did Vanguard's risk assessment and want to add bonds, you can consider other fixed income ETFs like BND which are baskets of high-quality bonds. This limits your upside potential but limits your downside risk.

Hope you have a great weekend!

Greg