Showing posts with label Value Investing. Show all posts
Showing posts with label Value Investing. Show all posts

Monday, July 14, 2014

The Lazy Investor’s Guide to Beating Wall Street

Thanks to financial networks like CNBC, many people are convinced that making money in the stock market should be left strictly to Wall Street professionals.

On any given day, talking heads and self-proclaimed "expert" guests toss around arbitrary numbers, market predictions, and jargon with total impunity.

But don't be fooled. Just because they talk in circles doesn't mean they are successful investors.

More often than not, their short-term predictions are flat-out wrong.

The average investor doesn't need cable news commentators, daily market forecasts, or hot stock tips.

Instead, following these four straightforward rules can help simplify your strategy—all while delivering long-term returns that beat the vast majority of actively managed mutual funds and stockbrokers.

1. Keep It Simple

Contrary to popular belief, you don’t need a chaotic mix of dozens of individual stocks and actively managed funds to build a properly diversified portfolio.

In fact, just a handful of low-cost index ETFs will instantly give you exposure to the entire global economy.

A classic, simple three-fund portfolio looks something like this:

  • Vanguard Total Bond Market ETF (BND) – For stability and income

  • Vanguard Total Stock Market ETF (VTI) – For overall U.S. market growth

  • Vanguard FTSE All-World ex-US ETF (VEU) – For broad international exposure

2. Keep It Cheap

When building your portfolio, index-based ETFs are an individual investor's best friend.

Because index funds simply track broad swaths of the market—like the S&P 500 or the Dow Jones Industrial Average—they don't require expensive fund managers.

Fund providers like Vanguard, Schwab, and Fidelity offer some of the lowest expense ratios in the industry. For example, Vanguard's VTI carries an ultra-low expense ratio of just 0.07% (7 basis points).

Compare that to the average actively managed mutual fund, which often charges well over 1.00% in annual fees while consistently underperforming the market over time.

3. Invest on a Regular Schedule

Consistently putting money into the market—often called dollar-cost averaging—removes destructive emotions like fear and greed from your investment strategy.

By investing a fixed dollar amount at regular intervals (such as every month), you naturally buy more shares when prices are cheap and fewer shares when prices are high.

It takes the guesswork out of building wealth, giving you zero reason to tune into daily market updates or buy investment magazines.

4. Rebalance Once a Year

Depending on your age, risk tolerance, and personal financial goals, you'll want a specific blend of stocks and bonds.

A traditional rule of thumb suggests holding your age in bonds. For instance, a 60-year-old investor might target a allocation of 60% bonds and 40% stocks.

Over the course of a year, market swings will naturally shift those percentages out of alignment. Simply set a calendar reminder to rebalance your portfolio back to your target allocation once every 12 months.