- The path to financial independence begins with budgeting and saving. Live within your means. Pay yourself first.
- Consumer debts and bad debts must be avoided absolutely. Good debts produce a positive return on the debt, increasing your net worth over time. Good debts invest in your future, including purchase of a principal residence, purchase of investment assets, growth of privately held companies, or funding education that produces increased income.
- Costs and taxes matter. Low costs and tax efficiency pave the road to wealth accumulation. Minimize trading, transacting, and turnover.
Properly measured, the average actively managed dollar must underperform the average passively managed dollar, net of costs. Empirical analyses that appear to refute this principle are guilty of improper measurement.
— William F. Sharpe, The Arithmetic of Active Management, 1991
- Plan and invest for the long term. Time is your ally (“time diversification”).
- Markets are highly efficient and represent the aggregate knowledge of all investors in the marketplace (“Efficient Market Hypothesis”). Never bet against the markets. This is best accomplished by holding low cost passively managed market capitalization weighted index funds for the long term.
Don’t think that you know more than the market; no one does. And don’t act on insights that you think are your own but are usually shared by millions of others.
— John C. Bogle
- Broad diversification is key to managing risk. Minimize idiosyncratic (unsystematic) and uncompensated risks through diversification (“Capital Asset Pricing Model” or “CAPM”).
- Stay the course and stick to your investment plan for the long term. Ignore the distractions and noise of the news media, financial services industry, and investment services industry. Ignore short term random price movements in the markets. Do not second guess or alter your investment plan in response to market events, reporting, or speculations, thus avoiding negative behavioral and market timing drags on investment returns.
Don’t do something—just stand there!
— John C. Bogle
- Never forget regression toward the mean (reversion to the mean, not to be confused with the gambler’s fallacy). Don’t chase performance. Don’t attempt to time the markets. Beware the investor return gap, the difference between the time weighted internal rate of return derived from a buy and hold investment portfolio and the inferior dollar weighted internal rate of return derived from inopportune and costly investor cash flows relative to the investment portfolio.
If the data do not prove that indexing wins, well, the data are wrong.
— John C. Bogle
- Short term market movements are random and unpredictable (“Random Walk Hypothesis”). No one can predict the future. No one can reliably time the markets. Past is not prologue to future.
Past performance does not necessarily predict future results.
— U.S. Securities and Exchange Commission
- Uncertain markets are buying opportunities, not selling opportunities. Buy low and sell high. Don’t sell low and buy high. Additionally, seize the many gifts offered by down markets, including performing judicious tax loss harvesting (please reference “Controversial strategies with limited benefit, no benefit, or possible detriment” topic for further refinement), refinancing debts at reduced interest rates, and performing Roth rollover conversions on pre-tax retirement assets at reduced asset prices with reduced tax liabilities.
. . . [B]ad news is an investor’s best friend. It lets you buy a slice of America’s future at a marked-down price.
— Warren E. Buffett
- Buy and hold investment assets for the long term. The correct length of time to hold investment assets is forever.
- Never trade, speculate, or attempt to time the markets. Trading and speculating in the markets constitutes a zero-sum game. Net of costs, trading and speculating in the markets constitutes a negative-sum game. Thus, trading, speculating, and market timing are a loser’s game.
- True investment assets are productive assets deriving value from an internal rate of return (e.g., dividend income, interest income, rental income). Speculative assets derive value from hope of future price appreciation (“Greater Fool Theory” or “Castle In The Air Theory”: res tantum valet quantum vendi potest, or a thing is worth only what someone else will pay for it). True investment assets include equity securities (stocks), real estate, ownership interests in privately held companies, and fixed income securities (bonds). Invest, do not speculate.
Get out of the casino and stay out!
— John C. Bogle
- Investment risks and expected returns are positively correlated, walking hand in hand. In order to pursue greater expected returns, greater investment risks must be accepted. The balance between investment risks and expected returns must be commensurate with risk tolerance, risk capacity, financial needs, liquidity needs, investment objectives, and investment time horizons. All investments are inextricably tied with the very real risk of losing your principal or more.
Be fearful when others are greedy, and be greedy when others are fearful.
— Warren E. Buffett
- Investing is essential to your financial wellbeing and risk is unavoidable. Choosing not to invest or choosing to invest solely in assets with low expected volatilities in order to minimize portfolio volatility guarantees the long term inflationary erosion of your purchasing power (purchasing power risk) and exposes you to the risk of outliving your assets (longevity risk).
There is no such thing as a safe investment. . . . A capitalist never chooses that investment in which, according to his understanding of the future, the danger of losing his input is smallest. He chooses that investment in which he expects to make the highest possible profit.
— Ludwig von Mises, Human Action: A Treatise on Economics, 1949
- Save and invest early and regularly. Plan for a long retirement. The best time to start saving and investing was yesterday. Second best is to start saving and investing today.
- Save and invest with discipline, reason, and courage. Emotion and impulse are your enemies.
Discipline equals freedom.
— Jocko Willink
- Simplicity is necessary for successful investing and financial planning. Beware the siren song of complexity. Complexity begets increased difficulty and time for implementation, direct and indirect costs, increased risks, diminished marketability and liquidity, diminished transparency and comprehension, and increased probability of plan failure. The simplest solutions are most frequently the best solutions (analogous to Occam’s razor or the law of parsimony: pluralitas non est ponenda sine necessitate, or plurality should not be posited without necessity).
- Avoid engaging investment products and strategies that you do not and cannot understand. Caveat emptor, or let the buyer beware.
- The only free lunches in investing are diversification and low cost passively managed market capitalization weighted index funds. Both are essential to your financial wellbeing.
Don’t look for the needle in the haystack. Just buy the haystack!
— John C. Bogle
- Beware the innumerable conflicts of interest within the financial services and investment services industries. If it sounds too good to be true, most likely it is too good to be true. Tread with skepticism and caution.
There are three kinds of lies: lies, damned lies, and statistics.
— Mark Twain, attributed to Benjamin Disraeli
- Self-insure (retain) to the maximum that you can comfortably afford. Self-insure for the minor exposures and inconveniences of life. Purchase appropriate, broad, and cost effective insurance contracts for major exposures that have the potential for inducing catastrophic financial losses (personal, property, and liability exposures).
- Laws and rules can and will change. Do not rely on the generosity or consistency of governments. Rely on sound, time tested, and long term financial and investment principles.
- Tax planning considerations must always remain subordinate to financial, investment, and business considerations. Do not allow the tax tail to wag the financial and investment dog.
- Investments in equity securities and / or corporate fixed income securities represent investments in businesses. Long term equities returns are derived almost entirely from dividend yields and earnings growth rates generated by businesses. Buying and holding U.S. broad equities market index mutual funds or exchange traded funds (ETFs) represent investments in publicly traded domestic U.S. businesses in the aggregate. Historically, growth of U.S. gross domestic product (GDP) has exhibited near perfect positive correlation with growth of domestic U.S. corporate profits. Ergo, buying and holding U.S. broad equities market index mutual funds or ETFs simply represents investment in the premise of continued long term U.S. GDP growth.
Buy American. I Am.
— Warren E. Buffett
- Plan for and anticipate only those events and scenarios that can be planned for and anticipated reasonably. Do not be concerned with planning for unplannable and unreasonable scenarios (e.g., world wars, demise of Western civilization, economic collapse of the United States of America, mass extinction events). No legal planning, diversification, asset allocations, investment assets, or insurance contracts will adequately protect you in such scenarios. Control only those risks which can be controlled.
The greatest enemy of a good plan is the dream of a perfect plan.
— Carl von Clausewitz, Vom Kriege (“On War”), 1832
- When funding competing financial and personal goals, recognize priorities:
- Retirement planning must supersede legacy planning and gifting. Look after your own retirement needs first. Once your retirement needs are secure, only then consider the wants of your estate and beneficiaries. The greatest gifts you can bequeath upon your adult children are your own and their own self sufficiency in your retirement years.
- Retirement planning must supersede education funding needs planning. Retirement goals cannot be funded from borrowing and must be funded from savings. Whereas, education goals may be funded from borrowing in the event of inadequate savings.
- Discretion is essential to accretion and preservation of wealth. Attracting attention towards wealth inevitably draws the attentions of those who seek appropriation of others’ hard earned wealth for themselves (e.g., via litigation, taxation, marketing, or theft). Minimize your exposures. Avoid becoming a target.
The world is not driven by greed. It’s driven by envy.
— Charles T. Munger
- Unexpected variables and unanticipated events can and will arise. This is a guaranteed prospect when developing a long term financial plan. Maximum plan efficiency will result in maximum plan fragility, with increased probability of plan failure. A judicious component of redundancy is necessary to maximize probability of plan success and longevity. Redundancies must be weighed against their opportunity costs.