What is the single most important investing belief?

[umfundi]

I've been contemplating this question over the holidays: So, I have developed some kind of belief system around investing. Which tenet is the most important?

I think it is the belief that markets are efficient. Not perfectly efficient, but efficient enough that I cannot hope to recognize and take advantage of any inefficiencies.

From this belief one must conclude that the price of everything reflects all available knowledge. I cannot know something that would affect the price that everyone else does not know.

The only rational response to this is to diversify. How to diversify? The only way I know is to look at history (yes, back test) and economic theories like the Efficient Frontier and Modern Portfolio Theory.

All this has not caused me to behave much differently, but I sure sleep better and worry less.

The key realization here, for me, is that so much of the debate in these forums really hinges on some manifestation of prediction or market timing, no matter how cleverly disguised. Or, that some people can use the same data to identify opportunities that everyone else is oblivious to.

Invest in TIPS! Dollar-Cost Average! What to do about the Euro crisis? Will Social Security disappear? Well, by all means,understand these issues, but there is nothing special you, as an individual can or should do. Recognize that each presumed crisis / opportunity rests on some prediction or assumption on the direction of future events. All those risks are accounted for in current prices. The best, most optimum thing you can do is spread your bets.

There are other elements that make up my belief system and govern my behaviors, but I was surprised to figure out how much derives from a belief in efficient markets.

To Prof. Dr. Burton Malkiel, my profound gratitude. (In spite of his recent tendencies to prediction.)

Best wishes, and Happy New Year.

You've all taught me a lot.

Keith

[PaddyMac]

Don't Panic. In nice big friendly letters.

That's all I got out of last year...

[yobria]

I couldn't agree more. And anyone who proposes investing based on market inefficiencies (active management, market timing, free lunches, etc) either:

a) Has something to sell you or
b) Has been duped by the hope of easy money

Nick

[William Million]

In the long run (and sometimes it can take 20 years), an investment in the U.S. economy (through a broad stock fund) will pay off.

[Qtman]

Those that beat the averages over time are about zero, therefore go for the average with minimal costs.

[kenner]

The single most important belief may simply be that "Self-Education" is paramount as to all aspects of investing (diversification, planning, taxation, costs etc.).

[Brody]

I've been contemplating this question over the holidays: So, I have developed some kind of belief system around investing. Which tenet is the most important?

Active investing vs. Passive Investing
Roth IRA vs. Traditional
Stocks vs. Mutual Funds
Stocks vs. Bonds
Bonds vs. Bond Funds
Active Funds vs Passive Funds
Savings vs. investing
Savings vs. paying off debt
taxable vs. tax deferred
domestic vs. foreign
allocation A vs. allocation B
load vs. no load
advisor vs. DIY
lump sum vs. DCA
Real estate vs. equities
Equities vs investing in one's own business
????? vs ??????

Everything that I can think of pales in comparison to:
"What matters most is the amount of money that is put away."

In my experience, regardless of the specifics, the following is usually true:
1)People who put away 10% of their income do fine.
2)People who put away 20% of their income thrive.
3)People who put away 30% of their income become relatively wealthy.

[William Million]

In my experience, regardless of the specifics, the following is usually true:
1)People who put away 10% of their income do fine.
2)People who put away 20% of their income thrive.
3)People who put away 30% of their income become relatively wealthy.

Amazingly true.

[3CT_Paddler]

For me it all boils down to this... over an investing lifetime, costs matter.

The market may or may not be completely efficient, but it takes truly terrific long term performance to beat the market after costs over a 40 year or longer period. That extra 2% or more every year puts an active manager at an extreme disadvantage in the long term. Instead of wasting time/effort trying to find a great deal (trying to find the next Google, Amazon, IBM), take the market price and spend your time on more enriching pursuits.

[stlutz]

[quote]I think it is the belief that markets are efficient. Not perfectly efficient, but efficient enough that I cannot hope to recognize and take advantage of any inefficiencies.[/quote]

Actually, I'd reconsider. Even if markets aren't efficient, there is still the fact that only 1/2 of the market could "beat" the market, and it would be even less than that after costs and after taxes.

A boglehead approach to investing really isn't dependent upon the EMH. It really just depends upon pretty basic math.

[maxfax]

I believe pure luck is the most important factor determining results.
Just like scientists say that 'eureka moments only happen to the well-prepared mind', so too savings $$ allows you to capitalize on luck when it happens.
But then, my own savings habits were formed in (and by) the era a double-digit yields from government-insured term deposits ... so of course that was pure luck as well.

[Midpack]

Invest in TIPS! Dollar-Cost Average! What to do about the Euro crisis? Will Social Security disappear? Well, by all means, understand these issues, but there is nothing special you, as an individual can or should do. Recognize that each presumed crisis / opportunity rests on some prediction or assumption on the direction of future events. All those risks are accounted for in current prices. The best, most optimum thing you can do is spread your bets.

Keith

I pretty much agree with the OP, and I think the underlined may be the most overlooked aspect of investing. I've done (slightly) better than average after expenses as a long time Bernstein/Bogle follower, as expected. Too many people come to me and just want me to tell them what to buy, they don't want to 'understand the issues.' And when the market takes the inevitable periodic dive, they panic and sell, so I never make any recommendations, not even to family.

Having the ability to not lose your head during market and/or economic excursions is key, and IMO that only comes from understanding market history, asset classes & allocation, etc. I know exactly why I own every fund and why my chosen AA, and no one should do otherwise IMO, but most aren't interested in knowing 'why.' So when funds/classes rise and fall I'm not usually (overly) surprised and I can sleep at night. I've ridden out '87, '00 (not a surprise at the time) and '08 - maybe a little discouraged, but I never sold out, in fact I bought in. This comes from understanding, The Four Pillars of Investing by Bernstein is one of several books that I think can provide the necessary knowlege. There are far too many other flashy 'get rich quick' books that will lead investors astray IMO.

I think the discussions here no matter how far fetched they may seem at times, are instructive and worthwhile in that they test our knowledge and thereby strengthen our understanding. The more I know, the better I sleep and just live life. And I hope I will always continue to learn. YMMV

[jon-nyc]

I cannot know something that would affect the price that everyone else does not know.

Of course you can, you just probably don't.

[prudent]

In the long run (and sometimes it can take 20 years), an investment in the U.S. economy (through a broad stock fund) will pay off.

I agree it comes down to this with respect to the most important belief. If you don't believe this to be true, there's no point to investing. Just put your money in the bank and watch inflation eat up your assets.

[Brody]

In the long run (and sometimes it can take 20 years), an investment in the U.S. economy (through a broad stock fund) will pay off.

I agree it comes down to this with respect to the most important belief. If you don't believe this to be true, there's no point to investing. Just put your money in the bank and watch inflation eat up your assets.

It would be easy to agree except for the fact that there are many people who have done very well for themselves being very conservative, staying away from debt and consistently putting money in the bank.

Take the last 20 years or any time period that you would like. Let one person put their money into the bank. Let the other put their money in the stock market. Which one will do better? My pick is whichever one put away more money.

My observational experience is that savers can do very well. Investors can do very well. The ones who don't do well are those who go back and forth between the two.

[VennData]

Nobody knows shoot.

implying (touched on above:) I can do BETTER than average if I use low-cost index funds, since I pay less costs. ...and reduce my risk with a sensible asset allocation (aka diversification) and by re-balancing, maintain that risk profile.

[Fallible]

For me it all boils down to this... over an investing lifetime, costs matter.

The market may or may not be completely efficient, but it takes truly terrific long term performance to beat the market after costs over a 40 year or longer period. That extra 2% or more every year puts an active manager at an extreme disadvantage in the long term. Instead of wasting time/effort trying to find a great deal (trying to find the next Google, Amazon, IBM), take the market price and spend your time on more enriching pursuits.

After 24 years in the market, I'm thinking more and more that it does indeed boil down to costs. That's why it's important to say low-cost index funds, not just index funds ( which may not always be low cost). Once investors educate themselves on the costs of actively-managed funds versus good low-cost index funds, cost would, or should, be the main determinant.

[TJSI]

Most important investing belief: That John Bogle gives very good advice.

[grok87]

Interesting thread. Not sure I could narrow it down to a single most important investing belief personally. But here are 10:
viewtopic.php?f=10&t=87293
cheers,

[bob90245]

In my experience, regardless of the specifics, the following is usually true:
1)People who put away 10% of their income do fine.
2)People who put away 20% of their income thrive.
3)People who put away 30% of their income become relatively wealthy.

Amazingly true.

Yes, this is my vote for The Single Most Important Investing Belief.

Savings rate is more important than earning a high rate on what's been saved. At least until you reach Critical Mass (i.e. the big pile you're aiming for when retired). But at that point, you're more concerned with capital preservation rather than making an already big pile even bigger.

[swaption]

The only free lunch is diversification.

[umfundi]

Interesting thread. Not sure I could narrow it down to a single most important investing belief personally. But here are 10:
viewtopic.php?f=10&t=87293
cheers,

grok,

I agree completely, but I think these are actions that flow from some overarching beliefs that you have not expressed.

===========

Thank you all, an interesting thread.

My original post was perhaps just a rationalization (for myself) of why I behave the way I do. And, my justification of a system or collection of beliefs that I think is self-consistent and rational.

Best wishes,

Keith

[umfundi]

I cannot know something that would affect the price that everyone else does not know.

Of course you can, you just probably don't.

jon,

I was expressing a belief, not a fact. Aside from inside information, I can't imagine what I may know that others don't.

And, since I am risk averse (don't want to go to jail), leveraging inside information is not in my investment paradigm.

Best wishes,

Keith

[magician]

. . . only 1/2 of the market could "beat" the market . . . .

I know what you mean, but this statement isn't true. If the market return is, say, 5%, you can have 90% of the people earn, say, 6% and 10% of the people earn -4%; 90% of the people have beaten the market.

[celia]

I think the most important investing belief is that you should DIVERSIFY.

That means hold different kinds of assets that are not correlated to each other. That means invest in the same asset over a period of time (dollar-cost averaging) so that some shares cost less than others, regardless of your time-frame. Invest in tax-deferred, post-tax (Roth) and currently taxed assets and take advantage of different tax rates depending what is in effect for any given year and what your situation is in any given year. Invest in yourself (and family), your own business, no more than 5% of your assets in stock for the company you work for. Invest in Social Security, a pension, and personal assets set aside for retirement, an emergency fund, and even charity.

[magician]

I think that the most important investing belief is that, eventually, I will get my money back.

[magician]

. . . I am risk averse (don't want to go to jail) . . . .

It sounds as though you are more punishment averse than risk averse.

[Rick Ferri]

Maintaining discipline through thick and thin is the key to investment success.

Rick Ferri

[snyder66]

I thing saving should be first above everything else. A million dollars cash is still a million dollars when compared with someone who didn't save as much. Pick any number to plug in...I think that overall expenses of investment vehicle is second. Followed by return and all of the rest.

[nisiprius]

1) "You can't cheat an honest man."

(This is related to the way con artists work. In almost every con, the mark believes he the beneficiary of some kind of shady deal. That's why they don't ask questions--and why they don't press if the con artist reacts with anger to the questions they do ask. Bernard Madoff's clients believed he was front-running his firm's brokerage clients on their behalf. If you ever saw the movie The Sting, the mark believes that the con artists have a partner in the Western Union office who is cheating by telegraphing horse race winners first, before sending the results to bookmakers.)

2) "If it looks too good to be true, it is."

[Van]

Do NOT loose capital.

[joe8d]

I thing saving should be first above everything else. A million dollars cash is still a million dollars when compared with someone who didn't save as much. Pick any number to plug in...I think that overall expenses of investment vehicle is second. Followed by return and all of the rest.

You nailed it.

[novastepp]

Take the time to invest in yourself.

[Taylor Larimore]

umfundi:

Most Important Investment Belief?

Author Bill Bernstein came close when he wrote:

"When I disagree with Jack Bogle, I am usually wrong."

Best wishes.
Taylor

[Fallible]

I thing saving should be first above everything else. A million dollars cash is still a million dollars when compared with someone who didn't save as much. Pick any number to plug in...I think that overall expenses of investment vehicle is second. Followed by return and all of the rest.

In an earlier reply here I agreed with another poster that investment costs are most important in deciding on good low-cost index funds versus actively-managed funds. I didn't think of savings as investing, i.e., investing in the market, but rather as saving money, some of which would be in the market and the rest for other things. But generally speaking, I think there's no question that saving is the most important thing you can do with your money. That's where it should all start.

[umfundi]

umfundi:

Most Important Investment Belief?

Author Bill Bernstein came close when he wrote:

"When I disagree with Jack Bogle, I am usually wrong."

Best wishes.
Taylor

Taylor, that is great!

I will add:

Even when I think I agree with Jack Bogle, I am probably not quick enough, nor smart enough, to take advantage of everything he says

By the way, the emphasis on savings rate by so many responders is a surprise to me. I completely agree, but it was so innate that I would not have expressed it as a basic tenet. I think I am prepared to concede #1.

Keith

[Johm221122]

Save early save often

[tms]

For me it all boils down to this... over an investing lifetime, costs matter.

Hmmm, someone can get their costs down to zero by only putting money in CD's, and save those 10 or 20 basis points that Vanguard charges.

[Culture]

In the long run (and sometimes it can take 20 years), an investment in the U.S. economy (through a broad stock fund) will pay off.

Came here to find this statement, left satisfied.

[plnelson]

I think it is to recognize that the future is unknowable. Markets, prices, demand, etc, cannot be predicted. You should not buy stock on the assumption that it will go up, or on the assumption that one asset class, e.g., stocks, will do any better than any other asset class, e.g., bonds.

[HongKonger]

I disagree with "I cannot know something that would affect the price that everyone else does not know."

I have held press conferences whereby the news I have delivered has pushed a stock price up in a single day by close to 10%.

[FabLab]

Everything that I can think of pales in comparison to:
"What matters most is the amount of money that is put away."

The only "magic formula" I know. For me, nothing else comes close.

[DartThrower]

Although I agree that saving is crucially important to successfully building wealth, I don't consider saving to be investment. Saving is the enabler of investment. The combination of those two gives an investor a shot at attaining a desired amount of wealth.

I'd like to add the concept of humility to the other responses in this thread. Personally I believe our society used to consider humility to be a virtue and its opposite, arrogance, to be a vice. For some reason today the roles are reversed and arrogance is seen more as a virtue. An arrogant investor may believe that he/she can beat the market or that a well chosen adviser can on the investor's behalf. The media of course has a key role in projecting this arrogance upon us. Jack Bogle along with many many in the academic community have carefully looked at the issues of investing and have come to the humbling conclusion that trying to beat the market will lead to unfavorable results for the large majority of investors.

To say that we don't know the future, or that we as individuals are not likely to be able to beat the market other than by luck, is a humbling exercise indeed. Do we have the humility to accept only "our fair share" of returns the markets offer us in the future, or does arrogance push us over to the other side?

[Default User BR]

Do NOT loose capital.

Cage it up!


Brian

[Cloud]

That the market will continue to rise in the long run.

[Rick Ferri]

.


Discipline!



.

[natureexplorer]

Diversification.

[james22]

Valuation matters.

[NAVigator]

Living below your means. Without this, saving is not possible. Without savings, investing is not advisable. From this simple practice, all subsequent investing beliefs are just refinements.

Jerry

[DartThrower]

Living below your means. Without this, saving is not possible. Without savings, investing is not advisable. From this simple practice, all subsequent investing beliefs are just refinements.

Jerry

Well put. The original topic was "What is the single most important investing belief?". If you define investing as any action someone takes to build wealth for the future then I would have to agree. We can invest in our future by living below our means today.

I think most people have a somewhat narrower concept of investing as just one particular aspect of the wealth building process, and that is to take existing and future savings (more or less as a given) and use them to achieve future financial goals. Investment refers to how the savings is used.