7 Investing Truths That Aren't

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Rowan Oak
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7 Investing Truths That Aren't

Post by Rowan Oak » Fri Oct 05, 2018 6:12 pm

Sometimes it’s not the crazy investing ideas that we need to avoid — it’s the ones that seem most sane. Many widely held beliefs about stocks, bonds and other investments sound like reasonable guidelines for where to put your money on Wall Street. But through my work in the financial industry, I’ve seen how these oft-repeated truisms can be the catalyst for financial disaster. So be on your guard against these seven misleading beliefs, and pay attention to the real truths instead.
7 Investing Truths That Aren't

by Allan Roth, September 7, 2018
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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galeno
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Re: 7 Investing Truths That Aren't

Post by galeno » Fri Oct 05, 2018 6:25 pm

I agree 100%.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

JoeRetire
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Re: 7 Investing Truths That Aren't

Post by JoeRetire » Fri Oct 05, 2018 6:25 pm

"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.

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Doom&Gloom
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Re: 7 Investing Truths That Aren't

Post by Doom&Gloom » Fri Oct 05, 2018 6:27 pm

JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
That sounds like a re-wording of Peter Lynch's advice about stock-picking.

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Re: 7 Investing Truths That Aren't

Post by willthrill81 » Fri Oct 05, 2018 7:25 pm

JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 7 Investing Truths That Aren't

Post by Greenman72 » Fri Oct 05, 2018 7:38 pm

“You don’t lose any money until you sell.”

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Taylor Larimore
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"How a Second Grader Beat's Wall Street"

Post by Taylor Larimore » Fri Oct 05, 2018 7:48 pm

Make sure you can explain your investing strategy to any 8-year-old.
Joe Retire wrote:That makes absolutely no sense.
JoeRetire:

I believe I could explain the simple Three-Fund Portfolio to most 8-eight-year old's. This is what Allan Roth did with his 8-year-old son.

Allan wrote a wonderful book about The Three-Fund Portfolio he recommended for his son. His son's portfolio now leads the pack of eight professionally designed portfolios:

CBS MarketWatch 8 Lazy Portfolios.

Best wishes.
Taylor
"Simplicity is the master key to financial success." -- Jack Bogle

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Re: 7 Investing Truths That Aren't

Post by Wakefield1 » Fri Oct 05, 2018 8:01 pm

Greenman72 wrote:
Fri Oct 05, 2018 7:38 pm
“You don’t lose any money until you sell.”
You don't have any money until you sell (unless you have dividends) :shock:

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Re: 7 Investing Truths That Aren't

Post by willthrill81 » Fri Oct 05, 2018 8:16 pm

Greenman72 wrote:
Fri Oct 05, 2018 7:38 pm
“You don’t lose any money until you sell.”
:oops:

Using that logic, those who still have Enron stock certificates haven't lost anything yet.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: 7 Investing Truths That Aren't

Post by randomguy » Fri Oct 05, 2018 8:32 pm

willthrill81 wrote:
Fri Oct 05, 2018 7:25 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
An argument could be made that if your investment strategy depends on understanding the intricacies of bonds, it is too complex:) I am prety sure I can explain my investment strategy to my 9 year old. All the implementation details? No way.

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Re: 7 Investing Truths That Aren't

Post by willthrill81 » Fri Oct 05, 2018 9:07 pm

randomguy wrote:
Fri Oct 05, 2018 8:32 pm
willthrill81 wrote:
Fri Oct 05, 2018 7:25 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
An argument could be made that if your investment strategy depends on understanding the intricacies of bonds, it is too complex:)
Try telling that to the Bogleheads. Most Americans have no clue of the relationship between bond prices, yields, and prevailing interest rates. All of that can be ignored, but whether it is prudent to do so is another matter.

At any rate, I still think that this way of thinking is pointless. Exceptionally few eight year olds are investing, and I see no point in trying to devise a strategy simple enough for "any" one of them to understand it. And withdrawal strategies are arguably even more complicated than investing strategies.

As Einstein (purportedly) said, "Everything should be made as simple as possible but no simpler."
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

stlutz
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Re: 7 Investing Truths That Aren't

Post by stlutz » Fri Oct 05, 2018 9:54 pm

#5 Investing Should Be Fun
I bought a Treasury Bond today and found it to be quite exciting. :sharebeer

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Re: 7 Investing Truths That Aren't

Post by mirror » Fri Oct 05, 2018 11:48 pm

willthrill81 wrote:
Fri Oct 05, 2018 7:25 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
Don't put all of your eggs in one basket. Seems pretty simple to me. :confused

On the other hand if you want to intentionally over complicate something that can be broken down simply I invite you to read the 300+ pages written in Principia Mathematica to prove 1+1=2, which I am sure most 8 year olds understand.

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Re: 7 Investing Truths That Aren't

Post by willthrill81 » Fri Oct 05, 2018 11:55 pm

mirror wrote:
Fri Oct 05, 2018 11:48 pm
willthrill81 wrote:
Fri Oct 05, 2018 7:25 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
Don't put all of your eggs in one basket. Seems pretty simple to me. :confused

On the other hand if you want to intentionally over complicate something that can be broken down simply I invite you to read the 300+ pages written in Principia Mathematica to prove 1+1=2, which I am sure most 8 year olds understand.
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "How a Second Grader Beat's Wall Street"

Post by JoeRetire » Sat Oct 06, 2018 7:43 am

Taylor Larimore wrote:
Fri Oct 05, 2018 7:48 pm
Make sure you can explain your investing strategy to any 8-year-old.
Joe Retire wrote:That makes absolutely no sense.
JoeRetire:

I believe I could explain the simple Three-Fund Portfolio to most 8-eight-year old's. This is what Allan Roth did with his 8-year-old son.

Allan wrote a wonderful book about The Three-Fund Portfolio he recommended for his son. His son's portfolio now leads the pack of eight professionally designed portfolios:

CBS MarketWatch 8 Lazy Portfolios.

Best wishes.
Taylor
I could explain modern portfolio theory to a two year old. That doesn't mean they would understand it.

I understand the simplicity point he was trying to make. He just used a nonsensical way of expressing it.

I'm pretty sure nobody would actually try to explain their strategy to their 8 year old child, then abandon it if their child didn't understand.
It made for a nice book gimmick, but isn't realistic strategy advice and was just laziness in the context of the article.

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Re: 7 Investing Truths That Aren't

Post by bertilak » Sat Oct 06, 2018 8:20 am

I basically agree with Roth, or at least with his point. If your strategy depends on understanding the "tricky, hard to explain, stuff" then perhaps your strategy is too, well, "tricky."

This doesn't mean that your explanation to an 8yo will be as deep as the explanation to a 16yo but the 8yo's explanation should be true as far as it goes and complete enough that the 8yo "gets the picture." For example:
  • There are thousands of companies in the world (like Microsoft, for example) that mostly make lots of money. They share those profits with those who have part ownership of the company (have "stock" in the company) or who have loaned money to the company (represented by bonds). Investing means to buy stocks and bonds so that you get to share those profits.

    One investment strategy is to try to predict which companies will be most successful and buy only their stocks and bonds. Unfortunately making accurate predictions is very hard to do and if you get it wrong you won't make much money or you might even lose money.

    A safer investment strategy, which we use, is to own stocks and bonds from many companies so we don't get stuck holding mostly stocks and bonds for companies that don't make much money or might even go out of business.
May neither drought nor rain nor blizzard disturb the joy juice in your gizzard. -- Squire Omar Barker, the Cowboy Poet

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Re: 7 Investing Truths That Aren't

Post by mirror » Sat Oct 06, 2018 8:29 am

willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
mirror wrote:
Fri Oct 05, 2018 11:48 pm
willthrill81 wrote:
Fri Oct 05, 2018 7:25 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
Don't put all of your eggs in one basket. Seems pretty simple to me. :confused

On the other hand if you want to intentionally over complicate something that can be broken down simply I invite you to read the 300+ pages written in Principia Mathematica to prove 1+1=2, which I am sure most 8 year olds understand.
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
I don't know Will, I didn't write the article. I was just stating that there are ways to explain things in a more simple manner. Have you ever watched a TED talk? The person is a subject matter expert and usually at the very top of their field. Yet in 20 minutes or less they can communicate a message that the average person can understand.

Actually a vast majority of people would be better off picking a target date fund and never changing it compared to what they are doing today. I think when people of similar interests get together they assume that the general population has the same general understanding about a particular topic because "everyone here does." I see this in other forums on other interest. They get in spirited debates about very minute details that only matter to a small fraction of people and assume that it applies to the average person.

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JoMoney
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Re: 7 Investing Truths That Aren't

Post by JoMoney » Sat Oct 06, 2018 8:33 am

I think I could argue just about all of those non-truths aren't falsehoods either.
... I mean, a trend following strategy that's buying stocks on the way up and trys to sell when it reverses has had periods of success... I would have a difficult time explaining duration or convexity of a bond fund to an 8 year old, but there's plenty of "story stocks" and mutual fund narratives that would be quite compelling ... no stocks are 'safe', but a portfolio of large blue chip dividend payers would be considered less risky on just about every measure ...
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

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Re: 7 Investing Truths That Aren't

Post by CppCoder » Sat Oct 06, 2018 8:35 am

willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
I thought that is what we tell everyone (else). The other 95% is us talking amongst ourselves. :D

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Re: 7 Investing Truths That Aren't

Post by Ron Scott » Sat Oct 06, 2018 8:38 am

willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm

Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
Don’t laugh. Sometimes I think half the people on this forum feel this is the way to go!
Retirement is a game best played by those prepared for more volatility in the future than has been seen in the past. The solution is not to predict investment losses but to prepare for them.

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Re: "How a Second Grader Beat's Wall Street"

Post by MNGopher » Sat Oct 06, 2018 9:38 am

JoeRetire wrote:
Sat Oct 06, 2018 7:43 am
Taylor Larimore wrote:
Fri Oct 05, 2018 7:48 pm
Make sure you can explain your investing strategy to any 8-year-old.
Joe Retire wrote:That makes absolutely no sense.
JoeRetire:

I believe I could explain the simple Three-Fund Portfolio to most 8-eight-year old's. This is what Allan Roth did with his 8-year-old son.

Allan wrote a wonderful book about The Three-Fund Portfolio he recommended for his son. His son's portfolio now leads the pack of eight professionally designed portfolios:

CBS MarketWatch 8 Lazy Portfolios.

Best wishes.
Taylor
I could explain modern portfolio theory to a two year old. That doesn't mean they would understand it.

I understand the simplicity point he was trying to make. He just used a nonsensical way of expressing it.

I'm pretty sure nobody would actually try to explain their strategy to their 8 year old child, then abandon it if their child didn't understand.
It made for a nice book gimmick, but isn't realistic strategy advice and was just laziness in the context of the article.
This ^

I teach 8th graders (age 13-14), normally science, but I also have what you might call an advanced study hall made up of students in the advanced algebra and geometry classes (basically all A students). We do a lot of mini units throughout the year, and I did an investment unit last winter. I was very pleased how they were grasping the concept of stocks, bonds, asset allocation, etfs, mutual funds, risk/reward, compounding interest, etc. However, when I had them design their own portfolio with pretend money, about half of them went all in on bitcoin :oops: Just goes to show that explaining and really understanding aren't the same thing.

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Re: 7 Investing Truths That Aren't

Post by Rowan Oak » Sat Oct 06, 2018 9:41 am

willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
"...95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day."

This is probably true at least for the "Investing - Theory, News & General" section of the forum and the best advice for the majority of people who visit the Bogleheads forum. Bogleheads.org is after all based on "Investing Advice Inspired by Jack Bogle". That said, he would probably just say we should have a Two fund portfolio (Vanguard Total Stock Market Index Fund (VTSAX) and Vanguard Total Bond Market Index Fund (VBTLX)) or the Vanguard Balanced Index Fund (VBIAX) and be done with it.

But then we wouldn't have anything to talk about.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: 7 Investing Truths That Aren't

Post by willthrill81 » Sat Oct 06, 2018 10:08 am

Rowan Oak wrote:
Sat Oct 06, 2018 9:41 am
willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
"...95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day."

This is probably true at least for the "Investing - Theory, News & General" section of the forum and the best advice for the majority of people who visit the Bogleheads forum. Bogleheads.org is after all based on "Investing Advice Inspired by Jack Bogle". That said, he would probably just say we should have a Two fund portfolio (Vanguard Total Stock Market Index Fund (VTSAX) and Vanguard Total Bond Market Index Fund (VBTLX)) or the Vanguard Balanced Index Fund (VBIAX) and be done with it.

But then we wouldn't have anything to talk about.
If that is indeed the case, it's odd that target date funds aren't recommended more often in the "help" section. Are most folks here recommending the 3-fund portfolio because they believe that's optimal or just because it's more Bogle-ish?
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Re: "How a Second Grader Beat's Wall Street"

Post by willthrill81 » Sat Oct 06, 2018 10:10 am

JoeRetire wrote:
Sat Oct 06, 2018 7:43 am
Taylor Larimore wrote:
Fri Oct 05, 2018 7:48 pm
Make sure you can explain your investing strategy to any 8-year-old.
Joe Retire wrote:That makes absolutely no sense.
JoeRetire:

I believe I could explain the simple Three-Fund Portfolio to most 8-eight-year old's. This is what Allan Roth did with his 8-year-old son.

Allan wrote a wonderful book about The Three-Fund Portfolio he recommended for his son. His son's portfolio now leads the pack of eight professionally designed portfolios:

CBS MarketWatch 8 Lazy Portfolios.

Best wishes.
Taylor
I could explain modern portfolio theory to a two year old. That doesn't mean they would understand it.

I understand the simplicity point he was trying to make. He just used a nonsensical way of expressing it.

I'm pretty sure nobody would actually try to explain their strategy to their 8 year old child, then abandon it if their child didn't understand.
It made for a nice book gimmick, but isn't realistic strategy advice and was just laziness in the context of the article.
:sharebeer
“It's a dangerous business, Frodo, going out your door. You step onto the road, and if you don't keep your feet, there's no knowing where you might be swept off to.” J.R.R. Tolkien,The Lord of the Rings

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Rowan Oak
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Re: 7 Investing Truths That Aren't

Post by Rowan Oak » Sat Oct 06, 2018 10:18 am

willthrill81 wrote:
Sat Oct 06, 2018 10:08 am
Rowan Oak wrote:
Sat Oct 06, 2018 9:41 am
willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
"...95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day."

This is probably true at least for the "Investing - Theory, News & General" section of the forum and the best advice for the majority of people who visit the Bogleheads forum. Bogleheads.org is after all based on "Investing Advice Inspired by Jack Bogle". That said, he would probably just say we should have a Two fund portfolio (Vanguard Total Stock Market Index Fund (VTSAX) and Vanguard Total Bond Market Index Fund (VBTLX)) or the Vanguard Balanced Index Fund (VBIAX) and be done with it.

But then we wouldn't have anything to talk about.
If that is indeed the case, it's odd that target date funds aren't recommended more often in the "help" section. Are most folks here recommending the 3-fund portfolio because they believe that's optimal or just because it's more Bogle-ish?
It's probably because of the inclusion of international stocks and bonds within the target date funds with no control over the international allocation.
“If you can get good at destroying your own wrong ideas, that is a great gift.” – Charlie Munger

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Re: 7 Investing Truths That Aren't

Post by dknightd » Sat Oct 06, 2018 10:28 am

JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
But it does. The simple strategy is to spend less you earn. Save/invest the extra. An 8 year old should be able to grasp that concept. If they learn young, and carry that concept forward, they will likely be in good shape when they get old enough to figure out how to best invest the money they have saved. Perhaps "best" is the wrong term. But if they saved money they are ahead of the curve.

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Re: 7 Investing Truths That Aren't

Post by ImUrHuckleberry » Sat Oct 06, 2018 10:40 am

Rowan Oak wrote:
Sat Oct 06, 2018 10:18 am
willthrill81 wrote:
Sat Oct 06, 2018 10:08 am
Rowan Oak wrote:
Sat Oct 06, 2018 9:41 am
willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
"...95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day."

This is probably true at least for the "Investing - Theory, News & General" section of the forum and the best advice for the majority of people who visit the Bogleheads forum. Bogleheads.org is after all based on "Investing Advice Inspired by Jack Bogle". That said, he would probably just say we should have a Two fund portfolio (Vanguard Total Stock Market Index Fund (VTSAX) and Vanguard Total Bond Market Index Fund (VBTLX)) or the Vanguard Balanced Index Fund (VBIAX) and be done with it.

But then we wouldn't have anything to talk about.
If that is indeed the case, it's odd that target date funds aren't recommended more often in the "help" section. Are most folks here recommending the 3-fund portfolio because they believe that's optimal or just because it's more Bogle-ish?
It's probably because of the inclusion of international stocks and bonds within the target date funds with no control over the international allocation.
I agree with your comment about international.

Additionally, most (all?) target date funds have a higher ER than a "roll your own" 3 fund portfolio. While they're still cheap, I see no reason to pay any extra when it's extremely simple to invest in a 3 fund portfolio instead.

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Re: 7 Investing Truths That Aren't

Post by CyclingDuo » Sat Oct 06, 2018 10:47 am

willthrill81 wrote:
Sat Oct 06, 2018 10:08 am
If that is indeed the case, it's odd that target date funds aren't recommended more often in the "help" section. Are most folks here recommending the 3-fund portfolio because they believe that's optimal or just because it's more Bogle-ish?
The target funds are recommended over and over on the boards from my observation.

Personally, I recommend the Three Fund because you can obtain Admiral pricing via ETF's which makes it slightly less expensive with regard to ER fees for those just starting out. I also like that the individual investor can choose when to rebalance.
"Everywhere is within walking distance if you have the time." ~ Steven Wright

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Re: 7 Investing Truths That Aren't

Post by CyclingDuo » Sat Oct 06, 2018 11:13 am

JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
As a pedagogue, it's not hard to do. Kids learn by doing.

When I was a kid, our family played the board game Monopoly. We did the same with our children and the kids loved it. They played it for nearly a decade, including with their friends.

The game has 7 important lessons that yes, even an 8 year old grasps:

https://blog.getwela.com/pastblogposts/ ... bout-money

Teaching kids about investing is rather easy...

https://www.cnbc.com/2018/05/30/kevin-o ... sting.html

http://time.com/money/4616756/make-your ... ng-genius/

https://trader.media/what-age-you-shoul ... -investing

https://investorjunkie.com/36071/age-ki ... t-account/

Planting the seeds early, and keeping it simple does the trick in the early going. Granted, it's a process and one shouldn't expect to accomplish the formal education of one simple little 2 minute chat to make an 8 year old suddenly be "in the know", but all the simple seeds that are planted will grow with patience. A parent will immediately know when they've gone too far and moved beyond the point of engaged interest from the child.
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Investment strategy for seven-year-old

Post by Taylor Larimore » Sat Oct 06, 2018 11:37 am

Make sure you can explain your investing strategy to any 8-year-old.
That makes absolutely no sense.
Bogleheads:

Bill Bernstein, Jane Bryant Quinn and others believe it does "make sense." This is the beginning of Bill Bernstein's free book, If You Can:
Would you believe me if I told you that there's an investment strategy** that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90% of finance professionals in the long run, and make you a millionaire over time? Well it is true.
** The Three-Fund Portfolio

Best wishes.
Taylor
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Re: Investment strategy for seven-year-old

Post by Rowan Oak » Sat Oct 06, 2018 12:14 pm

Taylor Larimore wrote:
Sat Oct 06, 2018 11:37 am
Make sure you can explain your investing strategy to any 8-year-old.
That makes absolutely no sense.
Bogleheads:

Bill Bernstein, Jane Bryant Quinn and others believe it does "make sense." This is the beginning of Bill Bernstein's free book, If You Can:
Would you believe me if I told you that there's an investment strategy** that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90% of finance professionals in the long run, and make you a millionaire over time? Well it is true.
** The Three-Fund Portfolio

Best wishes.
Taylor
Taylor Larimore, Bill Bernstein, Jane Bryant Quinn and Allan Roth agree. That's way more than enough for me!
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Re: "How a Second Grader Beat's Wall Street"

Post by Fallible » Sat Oct 06, 2018 12:58 pm

MNGopher wrote:
Sat Oct 06, 2018 9:38 am
...
I teach 8th graders (age 13-14), normally science, but I also have what you might call an advanced study hall made up of students in the advanced algebra and geometry classes (basically all A students). We do a lot of mini units throughout the year, and I did an investment unit last winter. I was very pleased how they were grasping the concept of stocks, bonds, asset allocation, etfs, mutual funds, risk/reward, compounding interest, etc. However, when I had them design their own portfolio with pretend money, about half of them went all in on bitcoin :oops: Just goes to show that explaining and really understanding aren't the same thing.
Well, if half did NOT go into Bitcoin, it shows your efforts were not in vain and may be more effective than many financial literacy courses. Did you include behavioral finance in your class, i.e., awareness of common investing pitfalls such as overconfidence and recency bias?
Last edited by Fallible on Sat Oct 06, 2018 1:53 pm, edited 1 time in total.
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Re: 7 Investing Truths That Aren't

Post by Fallible » Sat Oct 06, 2018 1:52 pm

CyclingDuo wrote:
Sat Oct 06, 2018 11:13 am
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
As a pedagogue, it's not hard to do. Kids learn by doing.

When I was a kid, our family played the board game Monopoly. We did the same with our children and the kids loved it. They played it for nearly a decade, including with their friends.

The game has 7 important lessons that yes, even an 8 year old grasps:
https://blog.getwela.com/pastblogposts/ ... bout-money. ...
Always glad to see references to Monopoly on the forum. I started it around 8 years old, playing with slightly older kids and not only learned about money basics, but about myself and my approach to money, what it could buy, what it shouldn't buy, how I handled risk and feared losing money. At that age, of course, I didn't fully understand all that until I was older and saw it played out with real money. But I think it shows how interested (half the battle) and receptive kids can be to learning about money, including investing basics. It will depend on how and what they are taught, by whom, and the skill of the teacher, but as your links show, it can be done.
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Re: Investment strategy for seven-year-old

Post by JoeRetire » Sat Oct 06, 2018 5:24 pm

Rowan Oak wrote:
Sat Oct 06, 2018 12:14 pm
Taylor Larimore, Bill Bernstein, Jane Bryant Quinn and Allan Roth agree. That's way more than enough for me!
Sure.

Everything I need to know I learned in kindergarten and all...

Fun to say. Nothing any adult would actually follow.

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Re: Investment strategy for seven-year-old

Post by Rowan Oak » Sat Oct 06, 2018 5:37 pm

JoeRetire wrote:
Sat Oct 06, 2018 5:24 pm
Rowan Oak wrote:
Sat Oct 06, 2018 12:14 pm
Taylor Larimore, Bill Bernstein, Jane Bryant Quinn and Allan Roth agree. That's way more than enough for me!
Sure.

Everything I need to know I learned in kindergarten and all...

Fun to say. Nothing any adult would actually follow.
I don't see your point.
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Re: 7 Investing Truths That Aren't

Post by digarei » Sat Oct 06, 2018 6:00 pm

I don’t pretend to be any smarter than Allan Roth... but he says his instincts told him to sell in 2008, while my instincts told me to buy.

Our “gut instincts” can be informed by our education and experience.

I suspect that this one-page article on the AARP website is meant for a different audience.
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Re: 7 Investing Truths That Aren't

Post by Rowan Oak » Sat Oct 06, 2018 6:30 pm

digarei wrote:
Sat Oct 06, 2018 6:00 pm
I don’t pretend to be any smarter than Allan Roth... but he says his instincts told him to sell in 2008, while my instincts told me to buy.

Our “gut instincts” can be informed by our education and experience.

I suspect that this one-page article on the AARP website is meant for a different audience.
But he then went against those instincts and rebalanced to his chosen stock allocation through 2008-09 and encouraged other investors to do the same. There's even a video of him saying this two days before the market bottomed in March 2009. https://youtu.be/p1oxrF1cUeQ
Last edited by Rowan Oak on Sun Oct 07, 2018 6:14 pm, edited 2 times in total.
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Re: 7 Investing Truths That Aren't

Post by Fallible » Sat Oct 06, 2018 6:48 pm

digarei wrote:
Sat Oct 06, 2018 6:00 pm
I don’t pretend to be any smarter than Allan Roth... but he says his instincts told him to sell in 2008, while my instincts told me to buy.

Our “gut instincts” can be informed by our education and experience.

I suspect that this one-page article on the AARP website is meant for a different audience.
Informed gut instinct could be the "expert intuition" that behavioral economist Daniel Kahneman has written about, as it is based not just on raw instinct alone, but on extensive learning and experience that enables quick and accurate judgements. Still, I understand what Allan means when, despite his extensive experience and professionalism, doing the right thing by buying still went against basic instinct. In my case, with 20 years in the market, I didn't sell, but I couldn't ignore my gut and buy.
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Re: 7 Investing Truths That Aren't

Post by Rowan Oak » Sat Oct 06, 2018 6:53 pm

CyclingDuo wrote:
Sat Oct 06, 2018 11:13 am
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
As a pedagogue, it's not hard to do. Kids learn by doing.

When I was a kid, our family played the board game Monopoly. We did the same with our children and the kids loved it. They played it for nearly a decade, including with their friends.

The game has 7 important lessons that yes, even an 8 year old grasps:

https://blog.getwela.com/pastblogposts/ ... bout-money

Teaching kids about investing is rather easy...

https://www.cnbc.com/2018/05/30/kevin-o ... sting.html

http://time.com/money/4616756/make-your ... ng-genius/

https://trader.media/what-age-you-shoul ... -investing

https://investorjunkie.com/36071/age-ki ... t-account/

Planting the seeds early, and keeping it simple does the trick in the early going. Granted, it's a process and one shouldn't expect to accomplish the formal education of one simple little 2 minute chat to make an 8 year old suddenly be "in the know", but all the simple seeds that are planted will grow with patience. A parent will immediately know when they've gone too far and moved beyond the point of engaged interest from the child.
Thanks for this.
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Re: 7 Investing Truths That Aren't

Post by pkcrafter » Sat Oct 06, 2018 8:01 pm

I don't get the knock on the eight year old comment. It simply comes down to investing can, and for most, should be very simple. We explain it that way to unknowledgeable adults every day. :happy

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Re: 7 Investing Truths That Aren't

Post by digarei » Sat Oct 06, 2018 9:04 pm

Rowan Oak wrote:
Sat Oct 06, 2018 6:30 pm
digarei wrote:
Sat Oct 06, 2018 6:00 pm
I don’t pretend to be any smarter than Allan Roth... but he says his instincts told him to sell in 2008, while my instincts told me to buy.

Our “gut instincts” can be informed by our education and experience.

I suspect that this one-page article on the AARP website is meant for a different audience.
But he then went against those instincts and rebalanced to his chosen stock allocation through 2008-09 and encouraged other investors to do the same. There's even a video from around 2008 of him saying this.
I didn’t mean to suggest that he was wrong.

Roth may have felt and acted exactly as he has written. My experience was a bit different yet this doesn’t detract from the larger truth that we should be wary of our own instinctual behavior. Depending on our own level of understanding, his truths may seem novel, self-evident or in need of additional nuance. I was attempting to add not subtract.

Overall, I think it’s a valuable contribution and I’m glad you posted the link. :happy

Fallible wrote:
Sat Oct 06, 2018 6:48 pm
Informed gut instinct could be the "expert intuition" that behavioral economist Daniel Kahneman has written about, as it is based not just on raw instinct alone, but on extensive learning and experience that enables quick and accurate judgements. Still, I understand what Allan means when, despite his extensive experience and professionalism, doing the right thing by buying still went against basic instinct. In my case, with 20 years in the market, I didn't sell, but I couldn't ignore my gut and buy.
Good observation.
Fallible wrote:
Sat Oct 06, 2018 6:48 pm
Informed gut instinct could be the "expert intuition" that behavioral economist Daniel Kahneman has written about, as it is based not just on raw instinct alone, but on extensive learning and experience that enables quick and accurate judgements. Still, I understand what Allan means when, despite his extensive experience and professionalism, doing the right thing by buying still went against basic instinct. In my case, with 20 years in the market, I didn't sell, but I couldn't ignore my gut and buy.
Sure. I had been in the market far less than twenty years in 2008 but knew I had little choice but to keep investing. We both did the right thing... even if the recovery had taken twice as long as it did.
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Re: Investment strategy for seven-year-old

Post by JackoC » Sat Oct 06, 2018 10:29 pm

Taylor Larimore wrote:
Sat Oct 06, 2018 11:37 am
Make sure you can explain your investing strategy to any 8-year-old.
That makes absolutely no sense.
Bogleheads:

Bill Bernstein, Jane Bryant Quinn and others believe it does "make sense." This is the beginning of Bill Bernstein's free book, If You Can:
Would you believe me if I told you that there's an investment strategy** that a seven-year-old could understand, will take you fifteen minutes of work per year, outperform 90% of finance professionals in the long run, and make you a millionaire over time? Well it is true.
** The Three-Fund Portfolio

Best wishes.
Taylor
I though Jane Bryant Quinn was talking about a 12 (14?) yr old. Seems it's regressing. :D

Seriously though, I think it's a figure of speech a bit carried away. There's no rational reason to literally stick to things little kids can understand. No matter who says that it does not make sense taken literally, IMHO. Taken figuratively as reinforcing the point 'an adult investor should be really sure *they* understand what they are doing', OK maybe.

Also the adult investor should not believe that there is no value in increasing their understanding of certain things, and the 'little kids should be able to understand' rhetoric can tend to suggest adults shouldn't expand their understanding. For example, there is no big problem with buying high grade bond funds, even for all of one's fixed income allocation. It's basically fine. However, in discussions here where CD's and bonds are compared it's clear some posters do not really understand various differences with affect the comparison and whether one might be better off with some in CD's: how to compare assets which are and and not marked to market as markets move, the embedded call options the issuer is long in a lot of the bonds in funds, the embedded put option the depositor is long in a CD (early withdrawal right even with penalty), how to think about liquidity over your whole portfolio, what the 'term premium' means and how it affects collections of fixed income assets kept at a constant maturity (like a fund). Anything but genius 7 yr olds or extremely bright, at least, 12 yr olds are not going to understand those things. But adult investors would be better off to learn to understand those things if they do not, though again calamity will not ensue if they don't have the time or inclination. But the idea they really shouldn't try to understand because little kids might not be able to, that doesn't make sense that I can see.

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Re: 7 Investing Truths That Aren't

Post by tarmangani » Sun Oct 07, 2018 12:29 am

willthrill81 wrote:
Fri Oct 05, 2018 11:55 pm
mirror wrote:
Fri Oct 05, 2018 11:48 pm
willthrill81 wrote:
Fri Oct 05, 2018 7:25 pm
JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
I entirely agree. Most eight year olds will have a hard time just understanding what fractional ownership of a multinational company is. Heck, a lot of adults have trouble with that one. And don't even think about trying to explain the intricacies of bonds.
Don't put all of your eggs in one basket. Seems pretty simple to me. :confused

On the other hand if you want to intentionally over complicate something that can be broken down simply I invite you to read the 300+ pages written in Principia Mathematica to prove 1+1=2, which I am sure most 8 year olds understand.
Investing doesn't have to be complicated, but I fail to see why we reducing it to the level of third grade understanding is worthwhile. If that was truly the optimal solution, then 95% of what goes on in this forum is counter-productive. We should just tell everyone to invest everything in low cost target date funds and call it a day.
I wouldn't say it's optimal to set it and forget it in a TDF but it is probably like 90% of the way there. So I wouldn't call it counterproductive but likely unnecessary for someone to make good. The Bogle way truly is so simple that an 8 year old can understand it, figure of speech aside. It's probably irritating for someone to admit this when they've spent so much time researching and studying. I analogize it to cribbage. That's a game I know very, very well, have played tens of thousands of games, studied discard tables, read lots of books, so on and so forth...and against a competent player, that is someone who doesn't make major mistakes, I'm probably 60% to win, that's it. Learning how to count hands and not make obvious mistakes, especially near the end game, gets you to like a 40% winrate even against great players. It's pretty annoying.

Or, if you want to drop the analogy and stick to our forum, what about the eternal debate of CDs vs. bonds? Basically doesn't matter and yet it's a nonstop cacophony here. What does matter is understanding the value of fixed income--and that's not really hard to comprehend.

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Re: 7 Investing Truths That Aren't

Post by Rowan Oak » Sun Oct 07, 2018 6:12 pm

digarei wrote:
Sat Oct 06, 2018 9:04 pm
Rowan Oak wrote:
Sat Oct 06, 2018 6:30 pm
digarei wrote:
Sat Oct 06, 2018 6:00 pm
I don’t pretend to be any smarter than Allan Roth... but he says his instincts told him to sell in 2008, while my instincts told me to buy.

Our “gut instincts” can be informed by our education and experience.

I suspect that this one-page article on the AARP website is meant for a different audience.
But he then went against those instincts and rebalanced to his chosen stock allocation through 2008-09 and encouraged other investors to do the same. There's even a video from around 2008 of him saying this.
I didn’t mean to suggest that he was wrong.

Roth may have felt and acted exactly as he has written. My experience was a bit different yet this doesn’t detract from the larger truth that we should be wary of our own instinctual behavior. Depending on our own level of understanding, his truths may seem novel, self-evident or in need of additional nuance. I was attempting to add not subtract.

Overall, I think it’s a valuable contribution and I’m glad you posted the link. :happy
Thank you for the clarification. I should have read your original post more carefully before replying. I think I hit reply about the second I read "...his instincts told him to sell in 2008". Guess my "gut instinct" was to defend Allan Roth!
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Re: 7 Investing Truths That Aren't

Post by digarei » Mon Oct 08, 2018 12:53 am

Rowan Oak wrote:
Sun Oct 07, 2018 6:12 pm

Guess my "gut instinct" was to defend Allan Roth!
You weren’t wrong to do so!

I think he was in attendance at this year’s Bogleheads conference. Looking forward to seeing a video of the ‘expert panel discussion’ where he was no doubt a participant. The audience at this event would be more informed than casual readers of AARP so we can hope for some good Q & A with the panel.

My favorite experts are knowledgeable yet humble. That’s Allan.
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Re: 7 Investing Truths That Aren't

Post by quantAndHold » Mon Oct 08, 2018 6:57 am

I don’t need to explain my investment strategy to an eight year old. I need to explain it to my wife, so that she can carry on if I’m not around.

I’m sure Allan Roth’s eight year old kid was easier, though.

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Re: 7 Investing Truths That Aren't

Post by moehoward » Mon Oct 08, 2018 7:38 am

JoeRetire wrote:
Fri Oct 05, 2018 6:25 pm
"Make sure you can explain your investing strategy to any 8-year-old. "

That makes absolutely no sense.
The article sounds like it was written by an 8 year old. I try to explain simple investing to adults that don't get it.

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Re: 7 Investing Truths That Aren't

Post by MathMann » Mon Oct 08, 2018 7:53 am

Sorry not a very good article on many levels.

#3 You Should Buy Good Companies

I can't even come up w/ a good response to this "myth". Lol.

#4 Large Blue-Chip, Dividend-Paying Stocks Are Safe

On a probability basis this is a true statement. A few blue chips will have issues but the vast majority will perform successfully over the long haul. For every GE, Eastman Kodak, Enron there are 100s of companies that have been around for dozens of years. Johnson & Johnson, Procter & Gamble, Coca Cola have been around for over 100 years.

#7 Look to the Past to See the Future

If you don't look to the past where do you get your information? Wild guessing ? CNBC ? Shark Tank ?

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Re: 7 Investing Truths That Aren't

Post by willthrill81 » Mon Oct 08, 2018 9:27 am

MathMann wrote:
Mon Oct 08, 2018 7:53 am
#7 Look to the Past to See the Future

If you don't look to the past where do you get your information? Wild guessing ? CNBC ? Shark Tank ?
:thumbsup

The whole "past performance doesn't predict future results" statement gets taken to the extremes far too often, including on this forum.
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Re: 7 Investing Truths That Aren't

Post by nedsaid » Mon Oct 08, 2018 10:20 am

JoMoney wrote:
Sat Oct 06, 2018 8:33 am
I think I could argue just about all of those non-truths aren't falsehoods either.
... I mean, a trend following strategy that's buying stocks on the way up and trys to sell when it reverses has had periods of success... I would have a difficult time explaining duration or convexity of a bond fund to an 8 year old, but there's plenty of "story stocks" and mutual fund narratives that would be quite compelling ... no stocks are 'safe', but a portfolio of large blue chip dividend payers would be considered less risky on just about every measure ...
What I would say is that there are nuances to investing. Not everything can be reduced to soundbites. Investing can be relatively simple but I would say in comparison to what? It is both easier and more difficult than it appears. Perhaps I will expand on that later. For now, I will say that emotional control is one aspect of investing that people don't think about enough.

For example, on Roth's point number 3, I would say buy good companies but don't overpay for them. If expectations are too high, even a good company can be a poor investment. Hence my multiple posts about my "Four Horsemen of Underperformance." I bought four great companies from the 1990's at "bargain" prices in the early 2000's but in retrospect still paid too much for them. They were AIG, GE, Microsoft, and Pfizer. Microsoft has turned around and I have replaced it with Ford in my "anti-index". Ford was extremely cheap but I fear it might just be a value trap. Roth makes a good point about Value but even experts can't always tell the difference between a good company with temporary problems and a Value trap. Even Warren Buffett has his clunkers.

On item number 4, Blue Chip dividend paying stocks are relatively safe, that is if you don't overpay for them. I would also say that even a portfolio of Blue Chip Stocks needs a bit of maintenance. Bad things can happen to good companies. You need to check to see that future prospects continue to be bright. Eastman Kodak is a good example, once photography went to digital, Eastman Kodak no longer had a competitive advantage, all kinds of companies were making good digital cameras. As Morningstar would say, look for companies that have a moat.

On point number 7, I agree that we cannot assume that the future will be like the past. But on the other hand, while history doesn't repeat itself exactly, it does tend to rhyme. The past is all we have when looking for financial data. Back testing is not useless but we have to realize its limitations. The past can give us a fairly good idea of what might happen in the future but the crystal ball is cloudy.
Last edited by nedsaid on Mon Oct 08, 2018 10:41 am, edited 1 time in total.
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