Back to the Basics: The PDQ Principles of Investing

While searching for a long-lost file in that great chasm called my computer, I stumbled upon a blog written over five years ago. I read it to see if I had managed to stick to my principles of investing over the years. I think I have, but I'll let my readers be the judge and jury. (And it never hurts to review the basics of what I think is a good approach to investing.)

Don't Suffer in Silence

Subscribers tend to come and go, but during Wynnsight’s first year, the blog retained 96% of its subscribers. Although some subscribers are routine readers, and some are not—we all lead busy lives. I appreciate the fact that most of you have stayed in touch. What concerns me are those who tend to come and go and may have missed details of some of the principles I admire.

Without question, I’m a John Bogle proponent. He’s gone now, but his commonsense books on investing remain, and I fear that many of the blog’s occasional readers might have missed some of my years-old comments that preached Bogleisms.

I’m going to take another shot at ‘em in today’s remarks, hoping “the silent ones” are listening in. If so, they’ll hear another Bogleism sermon. It’ll be short, sweet, and to the point because Bogle’s principles are the foundation and are embedded in my own PDQ Principles of Investing.

The ABCs of PDQ

Patience, Diversification and Quality. A good place to start is at the beginning with the development of a simple investment plan.

Start with a Plan

Without an investment plan… a savings strategy if you will… you’re sort of flapping in the breeze. The plan needs to be simple… and followed. Otherwise, why bother? To effectively use this plan, an individual should save on a routine basis.

And then, as Bogle would advise:

“Buy right and hold tight.” 

The time to start would be soon after nailing down that first real job. The place to start would involve buying an index fund around which to build a long-term portfolio. That’s right, make quality investments and keep them. If you don’t make informed investments, you’re just another ill-prepared investor chasing the latest rumor – essentially practicing the strategy of buying high and selling low.

Quality And Diversification

My own search for quality led me to John Bogle. The “Bogleism” that really impressed me involved his own pursuit of quality and his sound advice:

“Forget the needle, buy the haystack.”

Advice that involves both attraction and avoidance – the attraction of investors to mutual funds in general (and index funds specifically) while at the same time avoiding the purchase of individual stocks… the killing of two birds with one stone, shall we say. And, yes, I’ll continue to mention ad nauseam that index funds consistently outperform most actively managed funds as well as other investment strategies.

Why, you ask?

In large part because index funds save investors billions of dollars in fees, which reminds me of another Bogleism:

“Minimize costs."

During a 35-40 year working career, cost minimization will result in additional tens of thousands of dollars in your retirement fund. Reminds me of another Bogleism:

“Investors not only don't get what they pay for, they get precisely what they don't pay for."

In short, every dollar you save by investing in a low-cost, unmanaged index fund is a dollar of return that benefits you, not some Wazoo.

Avoid the Wazoos

In other words, avoid the Wazoos. Investment fees matter – a lot – as do those taxes generated by Wazoos who manage high turnover funds. Be as ruthless as you can in minimizing fees. Be an investor, not a gambler. Make quality purchases and fall in love with them… such that if you have to hold them through several lengthy Bear Markets, you won’t mind.

I call this index fund methodology“Daring To Be Average.” It involves being realistic about your long-term expectations of investment earnings. Be satisfied with earning “just the market average.” Over the long haul, you’ll end up more successful than most by doing so. Let “time” (compounding) instead of “timing” (inappropriate risk-taking) be your friend.

Patience And Compounding

Speaking of being patient with quality investments, another Bogleism rears its head:

“Time is your friend; impulse is your enemy." 

It brings to mind the true value of patient investing and the benefits of The Amazing Power of Compounding. Patience opens two primary avenues of benefits: compounding and avoiding fluctuations in highly volatile markets. No herd instinct for you. Stay the course as insinuated above in “Buying right and holding tight.”

One of my favorite Bogleisms is:

“Hedgehog beats the fox.” 

It's an effective thought process I employ in times of excess market volatility. I imagine rolling myself into a spiny ball and ignoring the foxes… those Wazoos… while patiently holding my low-cost, high-quality, well-diversified index funds. It’s not a pretty sight, but it works.

Risk

In the final analysis, there’s no avoiding risk in the marketplace. All of us must constantly weigh the risk of loss against the risk of not reaching our investment goals: creating a comfortable life, sending kids to college, and developing a low-stress financial retirement nest egg, etc.

Managing risk is the key. Exercising patience… controlling emotions… time spent in, not timing of the market… all the while, keeping things simple. Most of us don’t need the Wazoos and their costly, complex strategies. And it’s been my experience to ignore what they do during those volatile markets we all experience from time to time.

Don't Forget Your Umbrella

A predicate of this simple approach to investing is that all-important “Rainy Day Fund,” which is a stash of cash set aside to cover the inevitable financial emergencies – events such as employment interruption, medical emergencies, auto or home repairs, etc. – and to provide a financial firewall to protect one’s long-term investment portfolio. Rainy Day Funds help avoid borrowing money against 401(k)s or IRAs through loans, which are often not repaid and can have a long-lasting impact on life after retirement.

In Sum

In summary, develop a simple plan, stick with it, and start saving and investing early (which will allow you to enjoy the amazing power of compounding). Buy and hold low-cost, high-quality, well-diversified investments; avoid making impulsive decisions; and ignore the machinations of the so-called experts. They tend to flush on a whim, often advising others to do the same.

Be patient… be diversified… buy quality (PDQ), and you’ll likely enjoy a low-stress financial life before and during retirement.