Timeless Money Rules: More on Investing

Money magazine has a series on 20 timeless money rules that's pretty interesting. Over the next few days, I'll be sharing a few of these as well as my thoughts on them. The first one for today is to not time the market. Their thinking on this issue:

The lesson: The surest way to investing success is to buy, then stick to your guns.

This is why I buy and hold. And hold. And hold.

I've tried it the other way (early on in my investing career) and I paid for it. But experience is a great teacher and I learned at an early enough age what NOT to do. So now I add to my investments steadily every month and hold them forever.

Money's tips next discuss the fact that costs matter significantly when investing. They start with a quote from Jack Bogle:

Performance comes and goes, but costs roll on forever.

Ha! So true.

So many costs are fixed into many mutual funds -- costs that will be there no matter how the investment performs -- which in effect doom the funds to poor performance even before they get started. Here's what Money has to say:

If you choose a fund that eats up 1.5% a year in expenses over one that costs 1% (let alone the 0.2% that index funds may charge), your fund's return will have to beat the other's by half a point a year just for you to come out even. Past returns are no guarantee of the future, but today's low-cost funds are likely to stay low cost. Buying them is the only sure way of giving yourself a leg up.

Index funds. Nothing else needs to be said.

Money next advises that investors shouldn't follow the crowd. Their thoughts:

As the legendary financier Sir James Goldsmith has said, "If you see a bandwagon, it's too late."

I'm a big believer in going AGAINST the crowd. I detailed much of my rationale for this recently in Going Against the Flow.

Finally, for today, Money suggests that we buy low saying:

If a business is worth a dollar and I can buy it for 40 cents, something good may happen to me. --Warren Buffett

Now this is easier said than done, of course. But there are times when you can see that the market's acting irrationally, and if you have some money on the sidelines, you can swoop in and buy stocks while they are on sale.

For some more thoughts on these issues, see these posts:

• Costs Matter If You Want to Maximize Investment Returns

• Minimize Taxes to Maximize Your Investment Return

• Why I Like Index Funds

Comments

[Matt]

There is a relatively easy way to take advantage of what Warren Buffet is saying there. Buy Vanguard Small-Cap Value Index Fund (VISVX).

Value stocks are shares of companies with high book-to-market ratio (or, as you'll sometimes see it, low price-to-book). What's that mean in plain English? Bad companies. Dogs. Kmart, not Wal-Mart. It seems strange if you don't think about it much, but bad companies make great stock, and good companies make bad stock.

What's more, small companies exhibit this effect especially strongly.

It's doubly important to own small stocks through an index. Active management causes a lot of churn, which greatly increases transaction costs of smaller, less liquid stocks.