Three Requirements of Great Investing

Here's a piece from the Wall Street Journal where the author lists what she considers to be the three requirements of great investing. The summary:

Some might say the staunch investor is akin to a passenger on the Titanic, refusing a lifeboat to safety due to misguided loyalty to the idea of "buy and hold." But as long as three prerequisites are satisfied, that investor is among the most prudent savers around.

Those three requirements? A well-diversified investment plan, invested in low-cost index funds, with a long-term outlook.

She goes on to advocate the "set your plan with index funds, keep investing regularly, and ignore it from there on" plan that I also subscribe to. Obviously it's not that easy (you can't, of course, simply ignore your investments), but you can manage them with a minimum amount of time. What I suggest (it's what I do too):

1. Decide how you want to invest your money. If you want, you can use a simple three-fund plan to invest.

2. Make investments automatic. I do this in two ways:

• Money from my paycheck is deducted automatically every month and sent to be invested in my 401k.

• Money from my checking account (which receives my paycheck automatically each month via direct deposit) is automatically sent to Vanguard each month to be invested in my other accounts.

3. Supplement the automatic investing with additional funds. If I earn some extra income in a given month, I send it to Vanguard and invest it immediately.

4. Adjust investments once a year. I rebalance my investments so I have the right asset allocation.

It's a simple, yet effective, system that takes a minimum amount of time.

Comments

[Stephen]

Good, simple advice.

I am transferring my Roth IRA from a loaded American Fund account to a low-cost Vanguard Roth IRA. FMF -- What do you think of the target retirement date funds? How do they compare with a simple, index fund?

[Kevin]

Stephen - they are basically a pool of index funds if you look at their holdings. An index of indexes if you will. I looked at one for my retirement age and found it wasn't as heavily weighted in stocks as I would like, so I am doing my own allocation with Vanguard index funds.

[Trask]

Hey FMF,

With the Dow crashing nearly 400 points today, why don't you give us an update on your index fund portfolio. Oh yeah, no doubt you're heavily buying today as that's what you normally do when the market drops like this so tell us how much you're buying now if you don't mind.

[MonkeyMonk]

I can't vouch for FMF, but I put a purchase order in today for $15,000 worth of retirement funds that will process at the bell tomorrow. I've got a 18 year investment window so I'm thinking the odds or recouping my funds is looking pretty good.

[Mark]

I would agree with diversification and "buy and hold", BUT re-allocate your long-term retirement funds on a quarterly basis. If you must day-trade or time the market, then $10,000 is all I would wager. Playing the market game is fun and sometimes you win big. I'd much rather play that game then risking it all in Las Vegas. Do whatever gives you satisfaction, within limits. Life's too short!

I'll repeat what I posted before. The most respected investor in the country, Warren Buffet, was recently quoted as saying not to expect more than 6-7% annual returns in any diversified portfolio going forward, long term. The days of 10-15% returns in the stock market are long gone. Adjust your expectations accordingly and plug those numbers into the retirement calculator to see if you need to save more.

[FMF]

Trask --

I'll give an update of my net worth in mid-July and cover this issue then.

[Jesse]

@Kevin - I found basically the same thing. Vanguard's TRF was too mild for me. I just supplement with some additional equities and the re-balancing is *almost* on auto-pilot :)