By: Phillip Washington
The first book I ever read on investing was “Rich Dad Poor Dad” by Robert Kiyosaki. Fourteen years later, I’ve literally read hundreds of books and articles on investing, watched hundreds of videos and attended dozens of investment seminars.
What frustrated me early on was, one book would say “Put your money over here, don’t ever put it over there.” Then I would read another book by another expert that would say the exact opposite. The strategies they recommended were very complicated and required hours and hours of research per week. What was even more confusing was all the time it took to understand the language of financial “experts”. Here I was, a finance major, and I didn’t even understand half of what the F..(the F is for front door…smirk) they were talking about. (Honestly, I really question whether they did either years later reflecting back on it, but I’m digressing).
It took me a few years to take all that information I learned, test a few strategies for myself with my own money, and create simple system that worked for investors who valued simplicity (Like me).
Here’s the process I went through. I eliminated all the complicated investing strategies. Then, I got rid of all the strategies that required a lot of my time. From that list, I threw out the investments that had a high risk of exposing me to permanent losses (concentrated investments or in other words, non-diversified investments).
That led me to mutual fund investing (This can be done through IRAs, 401(k)s, Roth IRAs, or brokerage accounts, but that’s a topic for another post). Why did I start with aiming for simplicity? I have seen very few people build the foundation of their wealth on complicated, time consuming investments. Almost every wealthy person I’ve met or read about, built the foundation of their wealth by owning a business. So I wanted an investment strategy that would free me up to spend 90% of my time building businesses, while still allowing me to make a decent rate of return over time.
The reason most people say they want to invest outside of mutual funds is because they want to earn a higher rate of return to reach their goals faster. The problem with going outside of mutual funds is you expose yourself to possible big long term losses. For example: If you buy a mutual fund, you can buy a few thousand companies at one time. There hasn’t been an event where thousands of companies have gone to zero all at once yet. Thousands of companies have gone down a lot during a few big market crashes (and that’s hard to stomach), but not to zero. It doesn’t mean it won’t happen, but it’s hard to imagine a scenario where that happens and we don’t also lose the money we have in banks.
You can protect your money more by creating a mutual fund portfolio that owns over 10,000 companies in 40 different countries to allow you to be globally diversified, so you’re not exposed to a small number or industries or countries.
If you want to shoot for higher than average returns, here’s a link to download my Ultimate Guide to Money Management. Look at the investing chapter (page 13). I have an illustration that shows the long term returns of different asset classes. You can see that’s it’s not hard to take more risk in mutual funds, by putting more (not all) of your money in small cap value funds without giving up diversification.
I want to put my hard earned money in places where it’s extremely hard for me to lose a big chunk of my money permanently. If I’m going to lose money permanently, I will do it myself through my own businesses. That way I have more control, and I know who to blame.
“Okay Phillip. I hear you, but I don’t have to spend a lot of time doing research. I can just tune in to CNBC once a day to stay updated on the research the experts have done. They can help me keep my money safe and keep me ahead of big losses.” I use to think the same thing. After thousands of hours of wasted time (that I will never get back by the way), I came to hate watching CNBC and other “financial pornography”. The only reason I stay tuned in to what’s going on now (for the absolute least amount of time I have to) is to be able to speak knowledgeably to my clients about what fears or crazy opportunities that’s making its way through the news cycles. Media outlets are in business to sell TV ads. Their goal is attention, not necessarily giving great advice. They want you to keep tuning in so they can keep selling ads. Here’s a crazy story I read in an article. The producer who helped Jim Cramer create Mad Money also oversaw the production of Jerry Springer…think about that for a moment.
Here’s a quote from a well known magazine tycoon Steve Forbes “You make more money selling advice than following it. It’s one of the things we count on in the magazine business–along with the short memory of our readers.”
Let’s bring my point home. Most people are aware of the 80/20 principle (Google it). The majority of results and rewards come from a small minority of inputs. This principle applies to investing, except the gap is wider. There was a paper done in 1986 called “Determinants of Portfolio Performance” by Gary Brinson, L.Randolph Hood and Gilbert Beebower(Financial Analysts Journal, July/August 1986…Feel free to google it and read all the details of the study on your own). The paper showed that a portfolio’s target asset allocation (what percentage of your money is in stocks, bonds or cash) accounted for about 93% of its return. Stock picking, market timing and all other inputs to portfolio management accounted for the other 7% combined. This is not saying no one can time the market or become a superior stock picker (After all, Warren Buffett is one of the best stock pickers of all time). What it does make clear to me is that there’s a lot more effective way to achieve the investment results I need to achieve my long-term financial goals with way less stress. And isn’t that the point?
So don’t make it more complex than it has to be. You investing process really can be simple.
