It took our in-house financial guru decades to learn these wealth-building rules. It'll take you about 10 minutes
By: Ben Stein
Many years ago, when I first started filming Win Ben Stein's Money, my makeup artist was named Suzie. As Suzie combed, straightened, and powdered, I was often reading the Wall Street Journal or Barron's
or talking on the phone with my pal Phil DeMuth about investments. At
least once a week, Suzie would set her jaw firmly and say, "I've got to
learn all about this investing thing."
I never knew quite how to respond, because it's
impossible to know all about investing. No one makes the right
decisions every time--or even every year. Bill Miller, the brilliant
manager of Legg Mason Value Trust, had beaten the S&P for 15
straight years, but last year he lagged well behind it. Warren Buffett,
probably the smartest investor of our time, could have pocketed
billions by selling Coca-Cola when it was in the 80s and instead rode
it down to the 40s. Brilliant hedge-fund traders, who typically make
hundreds of millions a year, suddenly come up short and lose
billions--and their jobs. It doesn't happen every day, but it happens.
I'll bet you know the feeling. Of watching a stock
you sold triple in value in the years that followed. Of holding onto a
stock you bought for, say, $15 that's now selling for pennies.
It's happened to me, too. A lot. Which is why, over the years, I've
developed a few simple rules to invest by. I consider them the Zen of
investing, because if you work at them, they eventually become
instinctive. You won't have to think about them. You'll just abide by
them.
RULE 1: Instead of trying to time the market, try to tie it.
A
few months ago, I was lucky enough to meet Warren Buffett for dinner at
a curious restaurant in Omaha called Piccolo Pete's. As we settled in
at our table, near the disco ball, I asked him for the best piece of
advice he could give an ordinary investor. With a slight laugh, Mr.
Buffett said, "Know your limitations." The average investor, he
explained, isn't able to pick stocks that will outperform the market.
The managers the average investor hires aren't, either.
So unless you're a top sensei yourself, don't try
to beat the market. Instead, cast the widest net possible using index
funds. Buy a fund that tracks the S&P 500 or maybe even the entire
U.S. stock market. If you're able to lock in the gains of the
market--roughly 10 percent a year, historically--you will have
accomplished a vast amount.
If you want to duplicate the creativity of the
master, Buffett, buy shares of his company, Berkshire Hathaway. It's
not a low-priced stock--a single share of its Class B stock costs more
than $3,500--but it has averaged a 25 percent return over the past
quarter century. And its broad array of holdings makes it as
diversified as some mutual funds. You are strongly cautioned that
Berkshire Hathaway has had down years, and even long stretches of down
years. And my pal Warren won't be there forever.
RULE 2: When you're tempted to sell, buy.
When
stocks are in the tank, your gut will tell you to bail, to move your
money into less-volatile investments like bonds or money-market funds.
It's human nature. It's also a huge mistake. When the market
plunges--over days, months, and years--there are opportunities to make
real money.
Buffett explained it years ago in an annual
report: Whether a stock is priced low or high, he said, it's ownership
in the same company. So when the stock market puts a company on sale,
that's the best time to buy.
The inverse is also true: When the market is
reaching new highs, you'll be tempted to jump in with both feet. Don't.
This isn't necessarily a time to sell, but assuming you're investing on
your own in taxable accounts, you'll want to be buying less.
Important note: If you do all your investing within a tax-sheltered
401(k) or IRA, maintain or increase your contribution level no matter
which way the market's moving.
RULE 3: Collect sectors.
Your
best friend as an investor is time. Your portfolio needs to grow slowly
and sensibly. This means, of course, that you need to start saving
early.
But you have
another best friend, one you don't spend a whole lot of time thinking
about: diversification. You don't want to be thrown for a huge loss by
drops in any one sector. Make sure your holdings cover the entire
investment field, so if "energy" collapses, you might be protected by
gains in, for example, "financial services" or "health care." This is
another great reason to invest in an S&P 500 index fund: It
comprises stocks from virtually every sector.
You
need to be diversified by global region, as well. Mostly because of our
country's immense trade deficit, the dollar is likely to continue
falling for a long, long time. That means that long term you can make
money in foreign stocks and bonds denominated in local currencies,
because your euros or yuan, for instance, will buy more dollars when
you sell. Especially consider rapidly developing countries like China,
India, and Russia--they're likely to do well over the long run,
although, as we saw last February, the ride is sure to be bumpy.
Investing in these emerging markets is a great way to diversify your
U.S.-weighted portfolio.
Luckily,
there's an index fund for just about everything, including the emerging
regions of the world. Your ability to invest in Singapore, Brazil, and
other countries from the comfort of your PC is a heaven-sent gift to
the average investor. Give thanks. And buy, buy, buy.
RULE 4: Invest in yourself (involuntarily).
Chances
are you're putting away money for retirement automatically; your
employer takes it out of your paycheck, pretax. If you ever want to
amass a lot of liquid assets--that is, money you can spend today if you
want--you need to set your savings to automatic, as well.
You can sign up for automatic savings with your
bank and broker online. Have a specific amount taken from your checking
account each month and put into an index fund, low-fee variable
annuity, or diversified mutual fund. Arrange for a second deduction to
be put into a foreign index fund. "Fire and forget," as they say about
the military's smart weapons.
If you think you can beat the market consistently,
good luck to you. It took decades--yes, decades--for these lessons to
sink into my fuzzy brain. If it takes you only a few years, you'll be
doing great.
Suzie, I hope you're listening.
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