In the 1970s, nothing was scarier than walking around New York City. You know, all those alligators in the sewer.
And if a murderous reptile didn’t attack you from an open manhole, you had to worry about the killer bees buzzing in from Texas.
Legends at the corner of Wall Street and Broad
By the time I made my first mutual fund investment, I no longer worried about sewer gators and killer bees. Those urban legends had been debunked. (Hadn’t they?!?)
Now I had a new set of worries. As I tiptoed into the financial markets, I heard intimidating tales about what it would take to succeed as an investor. Some sounded plausible. But in time, I learned that these stories had no more basis in reality than the piranhas that, I was sure, lurked in my childhood swimming hole.
“You need to be some kind of financial genius”
This statement sounds perfectly reasonable. Many investment vehicles come wrapped in mathematics and legalese. And investing has its own strange vocabulary. Familiar words take on peculiar meanings. On Wall Street, “duration” is a measure of interest-rate sensitivity, not the amount of time left on the parking meter.
Although the trappings and jargon can be intimidating, they’re mostly irrelevant to the typical investor. If you’re investing for a child’s education, a financially secure retirement, or other long-term goals, your success depends on understanding and applying four simple principles:
- Create clear, appropriate investment goals.
- Develop a suitable asset allocation using broadly diversified funds.
- Minimize cost.
- Maintain perspective and long-term discipline.
This last principle may be the most challenging. The financial markets are full of fascinating stories and persuasive pundits, vivid stimuli that prompt us to DO SOMETHING when it would be best to sit tight. As Warren Buffett has observed, “Investing is simple, but not easy.”
But if you can master your emotions, investing is indeed simple. You can achieve investment success and reach your financial goals without a Ph.D. in finance or a Rain Man-like aptitude for numbers.
“You get what you pay for”
In much of our economic life, a higher price is associated with greater value. In investing, this economic reality is turned on its head. Indeed, research suggests that higher investment costs are consistent with weaker investment returns.
Wouldn’t paying the highest fees allow you to purchase the services of the greatest talents, and therefore get you the best returns? As it turns out, the data don’t support that argument. The explanation: Every dollar paid for management fees is a dollar less earning potential return. Keeping expenses down can help narrow the gap between what the markets return and what investors actually earn.
“It takes money to make money”
Maybe, but it doesn’t take a lot. With $1,000, you can buy a single fund that holds thousands of stocks and bonds from around the world. In a workplace retirement program such as a 401(k) plan, you can get started without meeting an investment minimum.
The belief that investing is an activity only for the wealthy is most dangerous to younger adults on tight budgets. They may not have much capital, but they possess a resource so precious that not even Warren Buffett can buy it: time.
Imagine you’ve just graduated from college. You’ve got student loans, rent, a modest salary. Somehow, you manage to invest $50 a month in a fund that returns, on average, 6% a year over the next 40 years.
When you hit your early 60s, those $50 investments will have compounded to almost $100,000. Try to accumulate that same sum over just 10 years, and you’ll have to salt away $600 per month. Much tougher.
Beware the bees
Investing’s urban legends have proved more persistent than stories about sewer gators. Eventually, perhaps, they’ll fade. Maybe we’ll shake our heads in disbelief that anyone could have considered investing an exclusive pastime of the wealthy. And we’ll be laughing at the idea that high prices buy higher returns … if the killer bees don’t get us first.