Wednesday, June 10, 2009

Book's Gist: The Six Rules for Lazy Investors

Build a million dollar portfolio the easy, boring way

10 or less funds. The six basic strategies used by America's laziest investors, guaranteed to help you diversify, lower risk, level out bull/bear cycles, and generate returns close to or better than market benchmarks:

1. Live below your means & save 10%
The math is so simple: Nothing saved equals nothing invested, equals nothing for retirement. Save at least 10% if you want to be a millionaire investor.

2. Swing for singles & bet on every horse
Millionaires match the averages by diversifying with low-cost, no-load index funds.

3. Trust the explosive power of compounding

4. No market timing, no day trading
Markets are random and unpredictable says Wharton economist Jeremy Siegel, author of "Stocks for the Long-Run." He researched the stock market's 120 biggest up and biggest down days between 1801 and 2001. He said only 25% had a rational explanation.

In a study of 66,400 investors, behavioral finance experts Terry Odean and Brad Barber concluded: "The more you trade the less you earn". The most active traders averaged 11.4% returns while their portfolios turned over 258%. Buy-and-hold investors with 2% portfolio turnover enjoyed 18.5% returns.

Traders lose money due to higher taxes, expenses and transaction costs.

5. Buy quality and never sell
Warren Buffett was once asked about his favorite holding period. "Forever," said the Sage of Omaha, who added that the best time to sell is "never!" Okay, there are some exceptions. But if you buy quality companies and index funds with proven long-term track records, you won't be tempted to sell when the market dips and talking heads on cable news freak out.
Remember, your most important decision is the up-front buy decision: So pick funds and stocks on the assumption you will never sell!

6. The tortoise always beat the hare
In researching 5,000 millionaires, money manager Ric Edelman discovered that they average six minutes a day on personal finance. They don't waste time watching cable news, reading self-serving brokerages reports, attending seminars, studying stocks tables, subscribing to financial newsletters, pondering economic reports, reading daily newspapers, etc., etc.

Millionaires spend six minutes a day on personal finances and live their lives for the other 23 hours and 54 minutes. They create diversified lazy portfolios that operate quietly in the background, generating nice long-term returns with minimal effort.

Most of these portfolios are as simple as Dr William Bernstein's "No-Brainer Portfolio" which is currently averaging just under 10% a year the past decade. Bernstein is the neurologist and money manager who wrote "The Intelligent Asset Allocator." You simply put 25% of your portfolio in each of four index funds (in this case Vanguard index funds) it's that simple, boring, dull and lazy:

Total Stock Market Index
Small-Cap Stock Index
European Stock Index
Total Bond Market Index

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