Rule of 72:
That is, X (the number of years it takes to double your money) times Y (the percentage rate of return you earn on your money) equals 72.
Luck in picking the right time to invest is all well and good, but time is much more important than timing.
The secret to saving is being rational. Being rational is simple, but by no means easy.
The only thing worse than dying is to outlive the money you have set aside for retirement.
You can be sure that whatever news you hear has already been reflected in stock prices. Something that everyone knows is not worth knowing.
The only forecast based on past performance that works is the forecast of which funds will do badly. Funds that have done really poorly in the past do tend to perform poorly in the future.
There is no persistence to above-average performance.
Mutual fund “performance” is almost as random as the market.
But that record was not achieved only by his ability to purchase “undervalued” stocks, as it is often portrayed in the press. Buffett buys companies and holds them. (He has suggested that the correct holding period for a stock is forever.) And he has taken an active role in the management of the companies in which he has invested.
Past performance is an unreliable guide to the future.
Diversify means:
1) across securities
2) across asset classes
3) across markets and across time.
If you are confused about how bond prices change as interest rates rise and fall, just remember the “see-saw” rule: When interest rates fall, bond prices rise. When interest rates rise, bond prices fall.
You can reduce risk by building up your investments slowly with regular, periodic investments over time. Investing regular amounts monthly or quarterly will ensure that you put some of your money to work during favorable periods, when prices are relatively low.
you must have both the cash and the confidence to continue making the periodic investments even when the sky is the darkest. No matter how scary the financial news, no matter how difficult it is to see any signs of optimism, you must not interrupt the automatic-pilot nature of the program.
The right response to a fall in the price of one asset class is never to panic and sell out. Rather, you need the long-term discipline and personal fortitude to buy more.
When markets are very volatile, rebalancing can actually increase your rate of return and, at the same time, decrease your risk by reducing the volatility of your portfolio.
Rebalancing will not always increase returns. But it will always reduce the riskiness of the portfolio and it will always ensure that your actual allocation stays consistent with the right allocation for your needs and temperament.
Investors will also want to consider rebalancing to change their portfolio’s asset mix as they age.
Avoiding serious trouble, particularly troubles that come from incurring unnecessary risks, is one of the great secrets to investment success.
As in so many human endeavors, the secrets to success are patience, persistence, and minimizing mistakes
The buy-and-hold investor who prudently holds a diversified portfolio of low-cost index funds through thick and thin is the investor most likely to achieve her long-term investment goals. Investors should avoid any urge to forecast the stock market.
But any investment that has become a widespread topic of conversation among friends or has been hyped by the media is very likely to be unsuccessful.
Following the herd—believing “this time it’s different”—- has led people to make some of the worst investment mistakes. Just as contagious euphoria leads investors to take greater and greater risks, the same self-destructive behavior leads many investors to throw in the towel and sell out near the market’s bottom when pessimism is rampant and seems most convincing. One of the most important lessons you can learn about investing is to avoid following the herd and getting caught up in market-based overconfidence or discouragement.
It’s not today’s price or even next year’s price that matters; it’s the price you’ll get when it’s your time to sell to provide spending money during your years of retirement.
The stock market as a whole has delivered an average rate of return of about 91⁄2 percent over long periods of time. But that return only measures what a buy-and-hold investor would earn by putting money in at the start of the period and keeping her money invested through thick and thin.
As an investor, you have one powerful way to keep from getting distressed by devilish Mr. Market: Ignore him. Just buy and hold one of the broad-based index funds
Any apparent stock market “pattern” that can be discovered will not last—as long as there are people around who will try to exploit it.
Psychologists also remind us that investors are far more distressed by losses than they are delighted by gains.
If you need to sell, sell your losers. At least that way you get a tax deduction rather than an increase in your tax liability.
There is one investment truism that, if followed, can dependably increase your investment returns: Minimize your investment costs.
Past performance is not a good predictor of future returns. What does predict investment performance are the fees charged by the investment manager.
Don’t jump from stock to stock or from mutual fund to fund as if you were selecting and discarding cards in a gin rummy game and thereby running up your commission costs (and probably adding to your tax bill as well).
The only way to get rich—unless you inherit or marry a fortune or hit the lottery—is to get rich slowly. Start early and contribute as much as possible to your savings for as long as possible.
The size of the cash reserve is up to you, but most financial planners suggest that in retirement, when no longer earning cash income, you set aside at least six months of living expenses.
When you buy insurance, remember the KISS principle: buy simple, low- cost term life insurance, not complex “whole life” insurance,
The biggest mistakes investors make are letting emotions dominate and being influenced by the crowd.
Use index funds for all your long-term investments. With index funds, you don’t get average performance. You get above-average performance because index funds have lower expense charges and avoid most unnecessary costs and unnecessary taxes.
You should focus on three simple investment categories:
1) common stocks
2) Bonds
3) real estate
The appropriate allocation for individual investors depends upon 3 key factors:
1) age (the primary one)
2) financial situation
3) temperament
The key to success in investing is to know yourself and invest within your investing capabilities and within your emotional capacities.
The appropriate allocation for those planning bequests should be geared to the age of the recipient, not the age of the donor, for that part of their total investments.
Charley points out that most young people don’t count their most important “equity”— their personal knowledge capital and the large present value of their future earnings from work.
The best choice for your equity investments is a fund indexed to the total world stock market. For your bonds, choose a total U.S. bond market index fund.
Some common stocks, however, are included to provide inflation protection and some TIPS (Treasury inflation protection bonds) are included in a total bond market index fund.
If you are fortunate enough to have enough capital to be able to meet your living expenses without tapping into your assets, you can choose a different asset allocation more heavily weighted to stocks. Money that you expect to leave to children and grandchildren should be invested according to their age, not yours.
Annuities have one important advantage—they ensure that you will not outlive your money. Most financial planners advise retirees to purchase annuities. And fixed annuities have one major disadvantage: Payouts do not increase to offset inflation. And only consider a plain vanilla fixed annuity.
We recommend that you concentrate on two broad-based index funds—one a total worldwide stock market fund and the other a total bond market fund.
There is a one-stop shopping method to obtain both domestic and international equity investments in one fund. The fund is called the Total World Stock Index Fund.
Money that will be needed for expenditure fairly soon should not be invested in the stock market.