10 In­vest­ing Tricks That Will Help You Out­per­form Most In­vestors


PHILADEL­PHIA — In mid-Oc­to­ber, more than 200 do-it-your­self in­vestors called the Bogle­heads (devo­tees of Jack Bogle, founder of in­vest­ment man­age­ment firm Van­guard) gath­ered at the 12th con­fer­ence to meet the guru him­self. Bogle is fa­mous for pro­mot­ing a low-cost in­vest­ing phi­los­o­phy that shuns ac­tively man­ag­ing as­sets to try to out­per­form the mar­ket. In­stead his strat­egy calls for pas­sive in­vest­ing, so one’s port­fo­lio rises along with the mar­ket. At 84, Bogle seemed chip­per de­spite a scapula in­jury that had his arm in a sling, and he was ready to talk about how best to in­vest as­sets to ac­cu­mu­late wealth, how best to spend one’s nest egg in re­tire­ment and other in­vest­ing-re­lated topics.

Be­low are 10 top Bogle­head in­vest­ing se­crets that could help boost your own port­fo­lio.

1. Live be­low your means.

This doesn’t just mean stay­ing out of debt, but also cut­ting costs so you can save for both short- and long-term goals, from big ex­penses to re­tire­ment. “If you don’t do that, the rest of the stuff doesn’t mat­ter be­cause you don’t have money to in­vest,” said Mel Lin­dauer, one of the mod­er­a­tors of the fo­rum.

2. Cost mat­ters.

When we ap­proach our in­vest­ments, peo­ple tend to fo­cus on their re­turns. But, as Bogle said on the sec­ond day of the con­fer­ence, “cost is the only thing that mat­ters.”

The ef­fect that costs have on per­for­mance can be neatly summed up in the be­low chart, show­ing that lower cost funds (in red) beat higher-cost funds (in tan) no mat­ter what as­set class they cov­ered:

So, when as­sess­ing any par­tic­u­lar fund, in­stead of be­ing dis­tracted by the col­or­ful line graph show­ing its re­turns from the last few years or the num­ber of stars it got on its Morn­ingstar page, look at th­ese ad­mit­tedly drier items: its op­er­at­ing costs, such as the fee paid to the man­ager, taxes, le­gal ex­penses, and more are traded; the higher the turnover, the higher the trans­ac­tion costs as­so­ci­ated with the fund when buy­ing or sell­ing shares of a fund. Ide­ally, all of th­ese fac­tors should be low or be­low av­er­age.

3. Buy the mar­ket/di­ver­sify.

But ac­tu­ally scratch that last bit of ad­vice, be­cause if cost mat­ters, then the only funds you should be look­ing at are in­dex funds.

Buy­ing the mar­ket has two ben­e­fits: First, it nat­u­rally di­ver­si­fies your hold­ings, hedg­ing your risk. Sec­ond, you’ll do bet­ter than most other in­vestors af­ter sub­tract­ing the fees other in­vestors pay in ac­tively man­aged funds.

“Why pay peo­ple to do what you can do your­self ?” Bogle said, adding that if there’s a 50/50 chance of pick­ing a good man­ager when try­ing to se­lect one mu­tual fund, then if you at­tempt to pick two mu­tual funds, your odds that both will be good go down to one in four, and if you want to choose three good mu­tual funds, your prob­a­bil­ity drops to one in eight, with four mu­tual funds, the like­li­hood is one in 16, and so on.

While some in­vestors might protest, say­ing that buy­ing the mar­ket will guar­an­tee you only “av­er­age” re­turns, Bogle says af­ter tak­ing fees into ac­count, you’ll end up out­per­form­ing oth­ers. “It seems aw­ful to say we want to pick av­er­age man­agers and win on cost, but that’s the

sure way,” he said.

4. Don’t look at past re­turns to gauge fu­ture per­for­mance.

“That’s what a lot of peo­ple do—es­pe­cially new in­vestors,” says Lin­dauer— and if that’s their first er­ror, their sec­ond is that when they look at past re­turns, they tend to be look­ing at ac­tively man­aged funds.

This is the clas­sic “buy high, sell low” mis­take. As Van­guard chief in­vest­ment of­fi­cer Tim Buck­ley said, “When eq­ui­ties are go­ing well, peo­ple pour money into them. When it crashes they get out…. Peo­ple are still chas­ing per­for­mance.” (Lin­dauer joked, “In­vest­ing is one of the few places where peo­ple don’t like to buy things when they’re on sale.”)

Buy­ing high and sell­ing low leads in­vestors to per­form even more poorly than their in­vest­ments. Lin­dauer said, “In­vestors un­der­per­form the very funds they in­vest in—be­cause they buy when it’s hot and then sell when it crashes. Say a fund re­turns 8%—the in­vestors might get only 6%.”

5. Never try to time the mar­ket.

“Peo­ple try to time the low spot and the high spot. They’re in and out. If you’re go­ing to bail, you’ve got to be right twice, be­cause now you need to know when to get back in,” said Lin­dauer. “Peo­ple bail out and then they won­der when’s a good time to get back in, and they wait and wait and wait, and watch the mar­ket go back up, up and up, and then say, ‘Okay, now it’s safe to get back in’—just about the time it peaks.”

So not only should you buy the mar­ket, but you should also stay in it. Over the long run, the mar­ket tends to go up, even if along the way, small dips do oc­cur.

“Don’t try to time the mar­ket—it’s time in the mar­ket that counts, not tim­ing the mar­ket,” said Lin­dauer.

6. Stick to your goals.

Just as you shouldn’t let drops in the mar­ket rat­tle you, don’t let other news do so ei­ther.

“The debt ceil­ing cri­sis—not sure how that would change your goals,” said Buck­ley. “If you had a kid or if your kid grad­u­ated from col­lege, that is a rea­son to change your goals, not what Congress is do­ing.”

7. Save as much as you can, as early as you can.

Sav­ing early al­lows you to take ad­van­tage of the power of com­pound­ing. If Per­son A saves $5,000 a year from age 25 to 40 for a to­tal of $75,000 and then never in­vests another penny, and Per­son B in­vests $5,000 ev­ery year from 40 to 65 for a to­tal of $125,000 in­vested, as­sum­ing 5% growth, Per­son A will end up with more than $400,000 by re­tire­ment, while Per­son B will only have $267,000, sim­ply be­cause Per­son A started sav­ing ear­lier, even if she put away less.

8. Look at the big pic­ture.

Of­ten, peo­ple fix­ate on the wrong de­tails. For in­stance, they’ll fo­cus on the per­for­mance of one in­vest­ment, in­stead of the over­all port­fo­lio. If you’re guilty of this, keep it sim­ple: go with a tar­get-date fund, which is a mu­tual fund that is a col­lec­tion of stocks and bonds whose al­lo­ca­tion is de­ter­mined by your pro­jected re­tire­ment date.

In­vestors also can detri­men­tally ob­sess over yield. For in­stance, in­vestors of­ten flock to div­i­dend-pay­ing stocks, but as Colleen Ja­conetti, Van­guard se­nior in­vest­ment an­a­lyst, said, “Div­i­dends some­times end up bring­ing in less than bonds be­cause of taxes and changes in the prices of stocks.” For in­stance, if you spend $100 on a stock, af­ter your $5 div­i­dend, the stock may be worth $95, mean­ing your fi­nal wealth is $100. On the other hand, if a $100 bond pays $3 in coupon in­ter­est, your fi­nal wealth is $103.

For that rea­son, Ja­conetti said, “Don’t just fo­cus on in­come re­turn [such as in­ter­est or div­i­dends], but also on cap­i­tal re­turn [the money you orig­i­nally in­vested] for to­tal re­turn.”

9. Au­to­mate good be­hav­iors.

Don’t rely on your­self to take the time and en­ergy to in­vest reg­u­larly. We all have busy lives. In­stead, in­vest au­to­mat­i­cally with ev­ery pay­check so that you don’t fall vic­tim to lazi­ness or panic and stop buy­ing if stocks are down.

Another thing you should do is re­bal­ance, which means re­set­ting your in­vest­ments back to your orig­i­nal al­lo­ca­tion af­ter you’ve given them some time to grow. For in­stance, if you started with 80% in stocks and 20% in bonds, but af­ter a year, your stocks com­prised 85% of your port­fo­lio, you should sell your eq­ui­ties to get back to 80%. Some com­pa­nies will au­to­mat­i­cally re­bal­ance for you, but if yours doesn’t, then set up your own sys­tem. Some peo­ple re­bal­ance on their birth­day; oth­ers wait un­til they’re five or 10 per­cent­age points off from their ini­tial al­lo­ca­tion.

10. Min­i­mize taxes.

Var­i­ous in­vest­ment ac­counts of­fer dif­fer­ent tax ben­e­fits. For in­stance, a Roth In­di­vid­ual Re­tire­ment Ac­count levies taxes on your con­tri­bu­tions now but al­lows your in­vest­ments to grow tax-free. Em­ployer-spon­sored ac­counts like 401(k)s and 403(b)s al­low you to de­fer taxes now, though you’ll have to pay Un­cle Sam when you with­draw the money dur­ing re­tire­ment. Some peo­ple have ad­di­tional in­vest­ment ac­counts since re­tire­ment ac­counts limit an­nual con­tri­bu­tions, but th­ese ac­counts are tax­able.

When you think about where to in­vest, Lin­dauer said, “Put your tax-in­ef­fi­cient things like bonds and any­thing that pays out a lot of dis­tri­bu­tions in your tax-de­ferred ac­count—you want them work­ing for you over 20-30 years. If you put them in your tax­able ac­count, you’re giv­ing the IRS 20% or 30% ev­ery year.” Tax-ef­fi­cient in­vest­ments, on the other hand, should go in your tax­able ac­count.

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