Taylor Larimore, Mel Lindauer and Michael LeBoeuf are the co-authors of The Boglehead’s Guide to Investing. Acolytes of Vanguard founder Jack Bogle, they believe in long-term, low-cost index fund investing. Here’s their advice on what resolutions an investor should make for 2011.
The best New Year’s resolution an investor could make is to read a good book about mutual fund investing that explains the logic and sophistication of Jack Bogle’s easy-to-understand investment philosophy.
My New Year’s advice hasn’t changed over the years, but I’ll repeat it again for those who haven’t seen it before.
Here’s my roadmap to financial independence.
- Start early.
- Live below your means.
- Save and invest wisely in low-cost index funds based on your ability, need and willingness to accept the associated risks.
- Stay the course. Only make changes to your investment plan when your personal situation changes.
When it comes to investing, listen to those who know instead of those who sell. Read just one good book on investing written by someone who has done objective research on the topic.
If you do that, you will find that almost all of those books will recommend that you do something very similar to the following 7 items:
- Choose an asset allocation plan that’s appropriate for your age, how soon you will need the money and your tolerance for risk. A good starting point for a retirement portfolio is to subtract your age from 110. Put that percentage of your portfolio in stocks and the rest in bonds/cash. Stay away from long-term bonds.
- Buy no-load, low-cost mutual funds. Make some, or all, of them index funds. Returns come and go. Costs are forever.
- Never try and time the market. You can get better odds of success in Las Vegas. Be a buy and hold investor.
- Tune out the noise. Turn off bubblevision. Many of the messages put out by Wall Street and the media they bankroll are designed to transfer your hard earned dollars into their pockets. Pay no attention to what the brokers and Wall Street pundits say. They get paid when you trade.
- Learn how to be your own financial planner and money manager. This stuff isn’t rocket science. If you passed 7th grade arithmetic, you can do it. Why transfer so much of your wealth to brokers and financial planners when you can do this yourself with very little time and effort?
- Periodically rebalance and stay the course. Check your percentage of stocks once a year. If it’s more than 10 percent off of what your asset allocation plan says it should be, readjust the portfolio back to the original target. It’s a simple way to buy low and sell high. No matter what happens, don’t vary from your asset allocation plan regardless of what the stock market does. Many more fortunes are lost due to emotions than the state of the economy. Sound investing should be as exciting as watching paint dry. If investing excites/depresses you, you’re doing it wrong.
- Finally, take at least 10 percent of each paycheck off the top and use it to invest for your future. If you don’t save, nothing else matters. And the more you save, the sooner you reach financial freedom.
That’s my story and I’m sticking to it.
Both Taylor and Michael recommended reading a good book on investing. Any books you found particularly helpful and would recommend? Please add your suggestions in the comment box below.