Wednesday, June 9, 2021

The Rules of Investing Club


  1. Stay invested - Don’t time the market. Timing the market is not just impossible. It is multiplicatively destructive in two ways: bad decisions compound mathematically and the likelihood of mistake compounds with attempts.
    • Sub-rule - Know what this means. It applies when the market is “down” and when it is “up”. What makes you think you can define these? What makes you think you’ll both get it right on the exit/entry (at least twice) and have the nerve to make the proper moves at that time. Also, wouldn’t timing imply buying low? So why are you bailing after a crash?... oh, because even though you didn’t see the downturn coming up until this point, you now can see definitively that a further decline lies ahead.
  2. Keep a cash reserve equal to X months expenses - X is up to you. A typical rule is 6 months, but mileage will vary. Be sure to include access to credit as a buffer as long as you also take into account that the event that causes you to tap into this safety reserve might also be damaging your credit access. Notice how this rule helps with adhering to the first rule.
  3. Diversify - The only "free lunch" in investing as it allows for (some) risk reduction without return reduction (up to a point) when done properly.
  4. Outsource - SPIVA. You ain’t special and just about no one else is either. Therefore, use well-run, low-cost, TRUE index funds. (Besides Vanguard, Fidelity and Schwab are also typically good providers.)
  5. Do what it takes to stay on plan - Employ dollar-cost averaging (DCA) or enroll in forced (passive) contribution increases or use a professional as a commitment partner.
    • Sub-rule - Make sure the pro has incentives that are congruent with your own, has the right credentials (CFA and CFP being the gold standards but experience matters a lot too), and is cost competitive. 

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