More Straight Talk on Investing

Jack Brennan

📚 GENRE: Business & Finance

📃 PAGES: 336

✅ COMPLETED: August 7, 2022

🧐 RATING: ⭐⭐⭐⭐

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Short Summary

Jack Brennan, a former Chairman and CEO at Vanguard, shares lessons and strategies for building a successful investment program from the ground up. More Straight Talk on Investing delivers a step-by-step guide to evaluating funds and designing a balanced, diversified portfolio that meets your financial goals.

Key Takeaways

1️⃣ Become a Financial Entrepreneur — Treat your investments like a business. Put the same amount of effort, focus, research, and care into your investment decisions as you would if you were building your own business. Don’t play around in this area. Take it serious.

2️⃣ Balance and Diversification — When designing your portfolio, build it with balance and diversification in mind. When the portfolio is balanced and diversified, you reduce its overall volatility and limit your risk to some degree.  A balanced and diversified portfolio will deliver a much smoother ride and produce strong, consistent returns over the long haul.

3️⃣ Commit to Dollar-Cost Averaging — Dollar-cost averaging involves putting a fixed amount of money towards a certain investment on a consistent schedule. When the market is down, your fixed investment buys more shares. When the market is up, your fixed investment buys fewer shares. The big benefit with DAC is that it gets you in the game and eliminates some of the “timing” worries that prevent many people from actually investing. It takes some of the emotion and guess-work out of investing.

Favorite Quote

“The overriding point is to get the money in the market, in the way you’re the most comfortable. You can’t win any game by sitting on the sidelines.”

Book Notes 📑

Preface

  • Quote (P. X): “I also underscore the concept of thinking of yourself as a financial entrepreneur — managing your financial life as an owner manages his or her business.”
    • Takeaway — Treat your investments with the same care and seriousness as you would your business. Stay informed and do a lot of research before throwing any amount of money at a stock or investment. 
  • Quote (P. X): “Costs, risk, and reward are the three critical factors when considering any investment. But only cost is actually known in advance and, all things equal, lower costs will result in higher returns for investors.” 
  • Quote (P. XI): “A short-term mentality, a lack of diversification, and an under-appreciation of liquidity, among other things, have tripped up the ‘smart money’ time and time again.”
    • Takeaway — Have a long-term, diversified outlook with the majority of your portfolio. It’s OK to put a very small percentage of your portfolio toward ‘fun, short-term’ trading, but you should have a long-term view with the large majority of your investments. 

Ch. 1: Successful Investing Is Easier Than You Think

  • Great Time to Invest — There has never been a better time to invest. The emergence of the internet, additional investment options, and tax-advantaged vehicles have made it a great time to invest.
    • Access to a wide variety of investment vehicles, including ETFs and mutual funds.
    • Strong educational material has never been more accessible. 
    • The internet makes it easy to track, monitor, and manage your investments anytime and anywhere.  
    • Tax-advantages vehicles like IRAs and 401(k) plans help to secure attractive tax benefits. 
  • Confident Investing — You don’t need to keep up with the daily moves of the stock market or hire a financial advisor to manage your investments. Anybody can develop a good investing strategy. Confident investing involves four qualities:
      1. Be Knowledgeable | Do Your Homework 
      2. Be Disciplined | Develop Good Habits
      3. Be Skeptical | Avoid Fads
      4. Be Observant | Keep Learning About Investing 
  • Be Knowledgeable — Have an understanding of the stock market and how it works. You don’t need to pay attention to it obsessively, but know the basics. Know the primary asset classes. 
    • Stocks — Represents ownership in the company. Gives you the right to vote on certain policy issues and participate in the growth of the company via a rising stock price. You are also eligible for dividends, if the company pays one. In the short-term, stocks can be risky because of the day-to-day random fluctuations in the market. But over the long-term, they are great — from 1926-2019, stocks delivered an average annual return of 10.3%. Worst case, the business goes bankrupt and you lose all of the money you invested.
      • Pros — You get to participate in the company’s success. When the company succeeds, earnings go up and stock price goes up. Over the long-term, stocks have been really good. Generally, if you can find a company with strong management and consistently rising earnings, you can make some good returns. 
      • Cons — Over the short-term, stocks can be wild. Rising interest rates usually make people sell their stocks and head to bonds. There are also a million random things that have nothing to do with the company that can affect a stock’s price in the short-term. 
    • Bonds — Basically an IOU or a “note.” You are a lender to the company or organization. Bonds pay you interest on your loan, and later repay your full investment at the bond’s maturity date. Bonds are fixed income because you know what will be coming to you. From 1926-2019, bonds delivered an average annual return of 5.3%.
      • Pros — Fixed income that is steady and generally safe. US Treasury Bonds are considered the safest. 
      • Cons — Inflation and interest rates. In the 1970s, bond interest payments couldn’t keep up with rising inflation, so people were actually losing purchasing power. Bond prices and interest rates have an inverse relationship, so when interest rates rise, prices of existing bonds fall. This is no big deal if you wait until the maturity date, but it’s a problem if you’re looking to sell your bond before the maturity date. Also, you don’t get to participate in the growth of the business like you do with stocks; you are just a lender. 
    • Cash — Very short IOUs (>1-year maturity). Bank deposit accounts and money market funds are the most common. These have been the least risky of the three major asset classes. This is where you want to put your money if you want consistency and immediate liquidity. From 1926-2019, cash investments delivered an average annual return of 3.4%.
      • Pros — Immediate liquidity. Money will be safe. If you need your money soon (i.e. a house purchase), this is a good spot to put it. 
      • Cons — Small return. 
    • Quote (P. 10): “If you want to reach for bigger returns, you must accept greater risks. Conversely if you want to minimize your risk, you must accept lower returns.”
  • Be Disciplined — The most important discipline you can participate in as an investor is saving money. You need to set aside money for investing with every paycheck you receive. The three big investing disciplines:
      1. Save — Set aside money with every paycheck. Then invest it. 
      • Quote (P. 10): “When people ask me for my best financial advice, I have only one answer: Live below your means.”
    2. Buy-And-Hold — Do your research, make your investment, then hold for the long-term.
      • Quote (P. 11): “The choice is pretty simple: Either you are a buy-and-hold investor or you are a trader. If you are a buy-and-hold investor, then once you have done your homework and set up an investment program, you just live your life.”
      • Quote (P. 12): “I’m a buy-, buy-, buy-and-hold investor, and so are all the successful investors I know. I firmly believe in committing money on a regular basis to an aggressive portfolio heavily weighted in stocks and holding pat no matter how the markets are performing in the short-term. It has worked for me and millions of people like me. If you follow this simple formula, you’ll be successful over the long term, too.”
    3. Don’t Keep Score — Check the progress of your stocks quarterly at the most. When you check every day, you are more likely to make an unnecessary move after seeing the short-term fluctuations that are mostly random.  
  • Be Skeptical — Don’t fall for some fancy “hot tip” you hear on the internet or social media. Always do your research and avoid investments that make promises. Treat your investments with the seriousness you would if you were running your own company. 
  • Be Observant — Keep absorbing new information. You don’t have to obsess over financial news, but read articles, watch television clips, and have a general knowledge of what’s happening in the market. There are three main reasons to stay up to date:
    1. Deepen your understanding of what happens to your investments.
    2. Protect yourself against developments that might threaten your investments. 
    3. Spot new opportunities. 
    • Quote (P. 14): “In any endeavor, whether it’s parenting, a profession, or athletics, you must keep learning to stay up to speed.”

Ch. 2: You Gotta Have Trust

  • Trust — The act of investing requires you to trust yourself, the financial market, and the power of long-term compounding returns.
    • Trust Yourself — Investing takes common sense and self-knowledge. Everyone has those two traits. Trust yourself to know your current financial situation, your financial goals, and your tolerance for risk. Then get to work investing in alignment with your criteria. When you trust yourself, you can easily tune out bad information and bad advice. It also prevents you from comparing your returns to somebody else’s. Have confidence in your ability to do your homework and invest well. 
    • Trust the Financial Markets — Historically, the annual growth of the US economy has outpaced inflation by 3.1% per year. The general growth of the global stock market has been great — a $1 investment in the S&P 500 Index in 1969 was worth $153 in 2019. Keep this in mind when the market is down. Overall, the stock market has been very strong through good times, bad times, wars, scandals, etc. You just have to be invest in good companies, hold for the long-term, and be patient. 
      • MSCI EAFE Index — A Morgan Stanley index that charts international stocks. It is similar to the S&P 500 in that way. 
      • Quote (P. 20): “An expanding economy generally means more jobs, higher incomes, and increased opportunities for businesses to earn profits. And increased profits will ultimately raise stock prices, producing gains for investors.”
        • Takeaway — Earnings (net income/profit) drive stock prices. If you believe in the economy and its ability to help companies improve their earnings, you should trust the stock market and invest. 
      • Quote (P. 23): “The value of your investment account is subject to euphoria-inducing gains and gut-wrenching losses over the short term. But over the long term, you are well rewarded for participating.”
      • Trust In Time — Returns over the long haul can be huge. The power of compounding returns is really strong. The longer you invest, the more astonishing the returns over time. A $5,000 investment every year for 10 years balloons to $787,000 after 40 years, assuming the investment averages an 8% annual return.
        • Don’t Touch It — Once you have made an investment in a company, mutual fund, etc., try not to touch it unless you have an emergency. The power of compounding works best when the funds can grow uninterrupted. 
        • Invest Dividends — Additionally, reinvest all income and dividends you receive from the investment instead of taking them in cash. 

Ch. 3: A Map to Success: Hmm, Sounds Like a Plan

  • Financial Entrepreneur — Always think of yourself as a ‘financial entrepreneur.’ We are all financial entrepreneurs, running our own financial operations, first in our working years and later in retirement. When you look at yourself in this way, it tends to make you take your investments more seriously. Again, operate your investments with the same focus, research, care, and diligence that you would use with your own business.
    • Saving — It starts with saving. Effective saving isn’t just tucking away as much money as you possibly can. It’s also knowing where to put your money so that it will earn a reasonable rate of return and be there when you need it.
  • Saving For College — Think of your different investing goals as ‘buckets.’ One of the big buckets for many people is saving for a kid’s college tuition. It’s important to start saving early. Begin with stocks when the child is young and adjust the portfolio to more conservative investments as the kid gets closer to college to protect the money. There are a few tax-advantages college savings plans.
    • 529 Plan — State-sponsored plan that has become the most popular choice. Earnings in the plan are exempt from federal income and capital gains taxes as long as the money goes towards college expenses. No income requirements to be eligible to use the plan. 
    • Education Savings Account (ESA) — Can contribute up to $2,000 per year on behalf of a kid under age 18, as long as you don’t exceed income limits. The low $2,000 per year contribution limit is the big drawback. Another drawback — ESAs count against a child’s potential financial aid more than a 529 plan. The funds can be withdrawn tax-free to pay for qualified educational expenses.
    • UGMA/UTMA — You or another adult custodian opens an account on behalf of a minor at the financial institution of your choosing and can invest as much as you like. These accounts have fewer tax benefits than the other two types of college savings accounts. Another drawback — when the child becomes the age of majority, he gets control of the account and can use the money however he wants. 
  • Saving For Retirement — To live comfortably in retirement, you’ll need annual income that’s at least 70-80% of what you were earning before you retired. This income/money will need to come from a combination Social Security, workplace retirement plan (401k), and personal investments. Once retired, you should aim to withdraw 4% per year at most from your investment accounts.
    • 401k — An employer-sponsored retirement plan that helps you shelter your money from taxes. You contribute to it now without paying taxes (pre-tax dollars) and you pay the taxes later when you withdraw in retirement, presumably at a lower tax rate. By setting aside part of your salary towards your 401k, you are also lowering your reported income, which means you will pay less taxes on the income you report to the IRS. You can have a portion of every check automatically go towards the 401k, and most employers will supplement your savings by matching your contributions up to a certain point (this is basically free money). Maximum annual contribution is $19,500. 
      • Quote (P. 37): “Here’s a piece of advice: If you have a 401(k) or other retirement plan at work that lets you have savings automatically withheld from your paycheck, go for it. Contribute as much as the plan permits. If you can’t make the maximum contribution, at least contribute enough to receive the full matching amount that your employer contributes. Then make it your goal to make the maximum contribution as quickly as you can.”
        • Takeaway — Contribute the maximum amount to your 401k that your employer allows. Try to work for a company that has a high match. Vanguard, for example, matches up to 10%!
      • Quote (P. 38): “You should set your sights on saving 10-12%.”
        • Takeaway — Shoot to send 10-12% of every check towards your 401k. If you get at least a 3% company match, you’re saving around 15% of your income towards retirement. You can work with you employer to change your saving rate. 
    • Roth 401k — A company-sponsored retirement plan that allows you use after-tax dollars as contributions. You essentially pay the taxes now and earn completely tax-free withdrawals later. Maximum annual contribution is $19,500 and there are no minimum distributions, unlike the Traditional 401k.
    • IRA — The traditional IRA allows you to contribute to your own personal retirement account using pre-tax dollars. By putting the money into this account, you lower your taxable income and are therefore taxed less every year by the IRS. When you withdraw in your late 60s and early 70s, you will have to pay taxes on the withdrawals, but the idea is that you will be retired and in a low tax bracket, so you won’t be paying too much in taxes on the withdrawals. This account makes sense if you are in a high tax bracket now and want to avoid paying high taxes on the money now. You essentially defer paying taxes on the money until you withdraw and are presumably in a lower tax bracket. Max contribution every year is $6,000.
    • Roth IRA — Also an individual retirement account that allows you to contribute after-tax dollars. When you withdraw the money later in life, everything is completely tax-free because you’ve already paid the taxes on the principle and the earnings grow tax-free. So, you pay taxes on the money now and in return get tax-free withdrawals down the line. This account makes sense for most people, but especially those in a low tax bracket now — just pay the low taxes now and get completely tax-free withdrawals later in life. Max contribution every year is $6,000 and there are no minimum distributions, unlike the traditional IRA.

Ch. 4: Save More - Without Feeling the Pinch

  • The Importance of Saving — When he first started at Vanguard in 1982, Brennan was helping a client move some funds in his daughter’s account. Brennan was surprised to see that the daughter had a six-figure account. The father explained that he had been saving and investing $50 into a Vanguard fund every month since his daughter was born. That small amount of money every month helped his daughter accumulate a six-figure account before she was 30. That’s the power of modest, disciplined saving and investing. 
  • Dollar-Cost Averaging — A strategy of investing a fixed amount of money in the market on a consistent schedule. When you do this, you take the emotion out of investing because don’t have to worry about investing at “the perfect time.” By investing a fixed amount you get more shares with your money when the market is down and fewer shares with your money when the market is up. It eliminates the guess work with investing.
    • Quote (P. 48): “To reap the advantages of dollar-cost averaging, you must maintain the discipline to make regular purchases through thick and thin. It’s easy to do that when the markets are climbing, but it can be very hard to keep on buying when the markets are heading down.”
    • Quote (P. 49): “The overriding point is to get the money in the market, in the way you’re the most comfortable. You can’t win any game by sitting on the sidelines.”
      • Takeaway — Save and invest your money. Put your money to work for you — it doesn’t help you if the money is saved but not invested. Dollar-cost averaging is a great way to invest because it takes the guess work out of picking the right companies or choosing the right time to invest. It gets you in the game. 
    • Ex. Invest $250 biweekly into a Vanguard ETF. Stick to it regardless of how the overall market is performing. 
  • Time — Your time horizon dictates how aggressive you can be with your investments. The more time you have in your investment program, the more risk you can afford to accept. The more risk you take, the greater your potential reward (or loss, be careful). The point is — you can afford to have a few bad years in your portfolio if you have a ton of time to recover.
    • Quote (P. 55): “Longer investment periods magnify the benefits of taking on increased risk. You have sufficient time to recover from down years and extra time to allow the outsized returns of good years to compound. As you can see, over long periods, the advantages are impressive.”

Ch. 5: Hope for the Best - But Prepare for Something Less

  • Financial Goals — When determining how much wealth you want to build over a certain time period, there are three factors to plug into a calculation. 
    1. The amount of your goal
      • Ex. $100,000
    2. The amount of time you’ll have to save for that goal
      • Ex. 18 years 
    3. The amount of investment return you can reasonably expect to achieve
      • Ex. 8%
    • Calculate It — Using the examples above, you would need to invest $207 at the start of every month to accomplish the goal of $100,000 in 18 years with an 8% average return. 
  • Inflation — The general increase in the prices of goods and services that tends to occur over time. It reduces everyone’s purchasing power. Inflation is every investor’s greatest enemy. The damage inflation goes on your investments is pretty steep over time, which is why it’s important to invest in stocks (rather than bonds and cash) because they provide greater upside against inflation. 
    • Consumer Price Index (CPI) — The best measure of inflation that most investors watch closely. The CPI tracks the prices of goods and services in eight major categories, including food and beverages, housing, apparel, transportation, medical care, recreation, education and communication, and other goods and services.
    • Historic Average — Historically, inflation averages about 2.9% per year in the United States. In the late 1970s, we experienced double digit inflation. Inflation is dangerous — at a 5% annual inflation rate, an item that costs $10,000 would sell for $43,200 in 30 years. 
    • Real Returns — Adjusted for inflation.
    • Nominal Returns — Not adjusted for inflation. Most investment returns you see published are nominal returns. It’s easy to account for inflation yourself — just pick an inflation rate and subtract it from the given investment return. 
      • Ex. 8% portfolio nominal return – 3% inflation = 5% real return. 
  • Use Conservative Estimates — When forecasting ahead, use a conservative estimate when deciding the annual market return you might get. The historical average has been about 10-11% per year, but you should use a number in the 5-7% range to be safe. It doesn’t hurt to be conservative here — it will drive you to save more and you’ll be happier if the market exceeds that 5-7% estimated average return.

Ch. 6: Balance and Diversification Help You Sleep at Night

  • Balance and Diversification — Balance and diversification help to manage the risks that are inherent in investing. They do not eliminate risk, but they help you limit the damage that big market downturns can cause if you’re all in on one asset class or investment. You reduce the volatility of your portfolio. 
    • Balance — Owning different types of investments, assets that typically behave differently from each other so they are unlikely to all take major blows. Having a balanced portfolio means owning at least two different asset classes among the big three of stock, bonds, and cash.
    • Diversification — Spreading your money around so you’re not heavily invested in one specific stock or asset. You are invested in several different companies in several different industries. 
    • Quote (P. 71): “In truth, you can do pretty well as an investor by keeping just two fundamental principles in mind: balance and diversification.”
  • Long-Term Strategy — Balance and diversification are long-term strategies that will help you limit damage in years when stocks are dropping because bonds or cash are likely to be up during those times. These strategies will result in fewer gains in hot years, but they are ultimately the foundation of a good investment program. Short-term tactics like day-trading and dumping all of your money into a handful of stocks are very risky. 
    • Ex. 1982 — Stocks returned an average of 6.5% per year from 1972-1981. In 1982, inflation averaged 8.6%, so you were losing 2.1% per year by investing in stocks at that time. Money market funds were returning 15% at the same time. Stocks went on to gain 17.5% per year in the following ten years. You never know when the asset classes might flip, which is why it’s good to have a balanced and diversified portfolio. 
    • Ex. 1981 — In the five years leading into 1981, corporate bonds returned 0.8% per year on average. Following 1981, bonds returned 15% per year for the next 10 years. 
    • Quote (P. 75): “Whenever you find yourself questioning the wisdom of balance, remember the difference between tactics and strategy. Tactics focus on short-term benefits; strategy looks to the long term. Tactics may win you a battle, but you need strategy to win the war.”
  • Vanguard Wellington Fund — A balanced and diversified Vanguard fund started in 1929 by Walter Morgan. It is the nation’s oldest balanced mutual fund, and contains a mix of stocks and bonds. Soon after it was started, the crash of 1929 and Great Depression happened. Because of its balanced approach, the fund has survived many of the market’s up and down swings. 
    • 1990-2019 — The Wellington Fund produced an average annual return of 9.5% comp rated to 10% for the S&P 500 Index over that period. 

Ch. 7: You Need a Personal Investment Policy Whether You're Starting at Zillions or Zip

  • Asset Mix — One of the first steps to developing your portfolio is deciding your preferred asset mix between stocks, bonds, and cash investments (i.e. Growth | 80% stocks, 20% bonds). There are a couple of factors to consider when determining your asset mix.
    • Financial Situation — Are you financially stable with a good job? If so, you can take more chances.
    • Time Horizon — How old are you and how many years do you have before retirement? There are two things to keep in mind here:
      • Short Term — If you need your money for a big investment (i.e. a house payment) sometime in the next 5 years, you shouldn’t be invested in stocks. The market risk is too great. 
      • Long Term — If you have a time horizon of more than 20 years, your primary investment should be in stocks. 
    • Risk Tolerance — How comfortable are you with market turbulence? If you’re not comfortable at all with short term slides in the market, you shouldn’t be completely invested in stocks. If you can mentally handle the ups and downs of the market, your risk tolerance is a bit better. There are risk tolerance quizzes that can help you asses all of this. 
    • Quote (P. 55): “Your asset mix will be a bigger factor in your investment returns than any selections you will eventually make of individual mutual funds or exchange-traded funds (ETFs).”
      • Takeaway — Take time to really figure out your asset mix. This is the first step to building your portfolio and serves as the foundation of your investing strategy. 
  • The Role of Bonds — In addition to being a bit less risky and serving as a nice source of consistent income (via interest payments), the primary role of bonds is to offset the volatility of stocks. They offer less upside than stocks, but they make your investing journey a little smoother. When stocks suffer, bonds usually hold the line or actually benefit from the slide. Bonds can make your portfolio a bit more consistent.
    • Inverse Relationship | Bonds & Interest Rates — Bonds and interest rates have an inverse relationship; when interest rates rise, exciting bond prices fall. Vice versa.
      • Ex. T-Bond — If you own a 30-year T-Bond paying 3% interest and interest rates in the market climb to 4%, nobody is going to pay full price for your bond paying 3% interest when they can get 4%. Your bond price has to fall. This doesn’t really impact you if you plan to hold the bond to maturity. 
  • International Stocks — US stocks account for 60% of the equity market, while international stocks account for the other 40%. Investing in international stocks can help diversify your portfolio because they often move in different directions than US stocks. International stocks also offer some good growth opportunities. Many companies in Europe, Asia, etc. are up-and-coming with a lot of growth ahead.
    • Cons — Political risk, volatility, and possible currency movements are the biggest areas for concern with international stocks. 
    • How To Invest Internationally — The best way to invest in international stocks is through broadly-diversified mutual funds or ETFs that track the foreign markets in Europe and Asia. 

Ch. 8: Mutual Funds and ETFs: The Easy Way to Diversify

  • Mutual Funds & ETFs — Two investment vehicles that make diversifying your portfolio easy and very effective. These should be the ‘building blocks’ of your portfolio because of their ability to help you create balance and diversification. The other way to diversify is to hand select certain companies in different industries, but this can take a lot more work and attention. Professional investment managers spend 40-60 hours per week looking over research and trends, and they still struggle to beat the market by picking individual securities. 
    • Diversification — Mutual funds and ETFs allow you to invest in far more companies and industries than you would be able to by yourself. You’re able to get a lot more exposure to the market by investing in funds than you otherwise would. 
    • Quote (P. 99): “There is an old saying that the three most important words in real estate are location, location, location. If there are three most important words in investing, they are diversification, diversification, diversification. Diversification will help you manage the risk that’s an inevitable part of investing in stocks and bonds.”
  • Exchange Traded Funds (ETF) — Introduced in 1993. ETFs are mutual funds, but they can be bought and sold at any time of day like a normal stock, unlike traditional mutual funds, which are priced at the end of the trading day based on NAV. They also have fewer expenses/costs than mutual funds because they don’t have an active manager — they usually just ‘track’ a certain industry or index (i.e. S&P 500). 
  • How Funds Work — The fund collects money from a large number of people, and the assigned portfolio manager uses the money to invest according to the fund’s stated objective (i.e. long-term growth, current income, etc.). All earnings — after expenses — get passed to the fund’s shareholders. 

Ch. 9: How to Pick a Mutual Fund (And How Not To)

  • Past Performance — For any security or fund, past performance is not a guarantee of future results. It’s important to always keep this in mind. Many websites, television shows, and social media “experts” like to assign ratings to certain funds or stocks based on past performance. But previous performance does not guarantee strong future performance. You have to do your research. 
  • Constructing a Portfolio — There are four core steps to building a long-term portfolio:
    1. Decide how to allocate your money among stocks, bonds, and cash.
    2. Choose where to invest within each asset class.
    3. Decide whether you want index funds, actively managed funds, or both.
    4. Evaluate and select specific funds.
  • Step 1: Allocation — The first step is deciding your splits. Examples include 80% stocks/20% bonds, 60% stocks/30% bonds/10% cash, and so on. Time horizon, risk tolerance, and financial situation are the factors to consider when deciding your split. 
    • Quote (P. 115): “A broad stock market index fund, a broad bond market index fund, and a money market fund will give you everything you need. If you are seeking a 60% stock/30% bond/10% cash asset mix, you would set up your savings program to funnel 60% of your money to the stock fund, 30% to the bond fund, and 10% to the money market fund.”
      • Takeaway — Decide your asset mix and then funnel your savings from each paycheck into funds/ETFs that are associated with each asset based on the percentage you decided on. 
  • Step 2: Where To Invest — After deciding your asset mix, the next step is picking funds within each asset class.
    • Money Market Funds — These funds invest in short-term debt securities from high-quality issuers, such as corporations and the federal government. The goal with these funds is to protect your money and be able to pull it out at any time if you need it quickly. You will not get great returns from these funds. There are typically three groups.
      • US Treasury Funds — Invest in securities issues by the US Treasury
      • US Government Funds — Invest in securities issued by government agencies. 
      • General Funds — Invest in securities issued by high-quality companies and banks 
    • Bond Funds — As with stocks, the income you receive from bonds will depend on the amount of risk you’re willing to tolerate. The more risk you’re willing to take, the greater the yield via income. There are three factors to consider when choosing a bond fund.
      • Tax Status — The income you receive from taxable bond funds is taxable. This includes virtually every bond fund except municipal bond funds. Never pick tax-exempt funds for an IRA, 401k, or any other account that is already sheltered from taxes. 
      • Credit Quality — The coupon/interest on the bonds of poorly-rated companies will be greater than on the bonds of companies with very high credit ratings. This is because companies with poor credit ratings (via Moody’s) will need to compensate you for taking the extra risk. Stick to bond funds that invest in companies with high credit ratings because the whole point of investing in bonds is to offset the risk of stocks. 
      • Maturity — Longer term bonds are more likely to experience big shifts in price than bonds with shorter maturities. As a result, long-term bonds generally pay more interest to compensate the investor for taking on the additional risk. If you need your cash inside of 10 years, don’t invest in a long-term bond fund. 
    • Stock Funds — Market Capitalization and Investment Style are two things to keep an eye on when picking stock funds. Funds with a lower market cap are investing in smaller companies that have more potential for growth and don’t really pay dividends. Funds with a high market cap are investing in big, stable companies that don’t have as much growth potential. Value and growth are the two investment styles most funds choose between. A couple of stock funds to consider:
      • Total Stock Market Fund — These funds track the entire market, including companies from all kinds of industries. 
      • Sector Funds — These typically track a certain sector or industry and are more volatile than broad funds. 
      • Global Funds — These track the international markets and give you some exposure to foreign companies. Don’t allocate any more than 30% of your stock fund allowance to global funds. 
  • Step 3: Actively Managed Funds or Index Funds? — You can choose between index funds or actively managed funds. Actively managed funds typically come with higher costs and try to beat the market. Index funds work to track the market.
    • Index Funds — Introduced in 1970s and essentially try to mirror/recreate the market; they don’t really try to beat the market. These are typically unmanaged funds that have very low costs and should be a primary selection in your portfolio. 
      • Quote (P. 125): “Here’s my position: index funds have advantages so powerful that you should use them for the core of your portfolio. Indeed, an all-indexed portfolio can work very well.”
      • Quote (P. 126): “What’s so great about index funds? Why do I recommend that you do without the shrewd selection, market savvy, extensive research, and all that? It’s because history has shown that, despite those advantages, collectively, active managers don’t beat the indexes even half the time.”
        • Takeaway — Go with index funds as the foundation of your portfolio. These are a great way to achieve both balance and diversification, and have very low costs. Portfolio managers try to beat the market, and they usually fail. Go with index funds that will ride with the market and give you steady gains with little effort. 
    • Popular Index Funds — There are a few popular indexes that can give you great exposure if you invest in the corresponding index funds. You can find index funds tracking stocks as well as bonds, so you can get good exposure to both asset classes using index funds.
      • S&P 500 Index — Tracks large-cap US stocks 
      • CRSP US Total Market Index — Tracks the entire US market
      • Russell 1000 Index — Tracks large-company US stocks
      • Russell 2000 Index — Tracks small-company US stocks 
      • FTSE Developed Europe All Cap Index — Tracks stocks of companies located in 16 European countries, mostly in the United Kingdom, Germany, France, and Switzerland.
      • FTSE Developed Asia Pacific All Cap Index — Tracks stocks of companies located in Japan, Australia, South Korea, Hong Kong, Singapore, and New Zealand.
      • S&P 500 Growth Index — Tracks high upside, smaller cap stocks in the S&P 500 Index.
      • S&P 500 Value Index — Tracks the consistent value stocks included in the S&P 500. 
  • Step 4: Evaluating A Fund — Evaluating a funds involves reading the prospectus and doing your own homework. Ideally you want three things with any fund you invest in:
    • Low Costs
    • Solid Performance
    • Consistent Performance

Ch. 10: It's What You Keep That Counts

  • Pick Low-Cost & Low Expense Funds — Pay attention to costs and expense ratios when looking into funds, especially actively managed funds. ETFs and Index Funds will have low costs because they aren’t managed and don’t make many trades. High costs and expense ratios eat into your returns, so you need to limit them as much as possible. 
    • Quote (P. 142): “As an investor, you put up the capital and you take the risk. It makes sense to minimize costs so that you — not the investment provider — will earn the bulk of the returns. The bottom line: Choose low cost funds.”
  • Taxes Are Costs, Too — Taxes are damaging, so do what you can to limit them. With mutual funds, you are taxed when the fund distributes income (dividends from companies the fund owns), when it distributes capital gains, and when you sell shares of the mutual fund in the market. A few ways you can limit the hurt that taxes can do include:
    • Trade Less — It pays to have patience. If you sell your shares inside of a year after buying them, you will be taxed at your ordinary income rate (your tax bracket). If you hold them for over a year, you are taxed at the capital gains rate of 15%. This is one of the reasons why it’s best to own Index Funds or ETFs instead of mutual funds — they merely try to mirror the market and therefore don’t make many trades. 
    • Tax-Efficient Funds — If you’re in the 30% tax bracket or higher, consider municipal bonds. These generate lower returns, but are exempt from federal and, in some cases, state taxes. 
  • Asset Location — Pay attention to which accounts you are buying certain investments in. It doesn’t make sense to buy a tax-efficient fund or investment in an account that is already tax advantaged, like a retirement account. 

Ch. 11: Risk - Give It the Gut Test

  • Risk — You have to take risks to get any kind of reward. With investing, there will always be risk involved. But in order to live comfortably in retirement and outpace inflation, you need to invest. There are a couple of ways to evaluate risk:
    • Standard Deviation — Measures how much a fund’s returns have bounced around its average return over the past three years. If a fund returns roughly the same percentage but has a smaller standard deviation, you want to go with that one.
      • Ex. Fund A — Fund A produces annual returns of -5%, +10%, and +25%. That’s an average standard deviation of 15. 
    • Beta — Measures how sensitive a fund has been to the performance of the market. A beta of 1.0 means the fund moved exactly the same amount as the market. A beta of 1.5 means the fund has been more volatile and gained 1.5% for every 1% climb in the market. On the other hand, it means the fund dropped 1.5% with every 1% fall in the market. 
  • Risk Tolerance — Only you can decide how much risk you’re willing to tolerate. It really depends on your individual financial situation, time horizon, and emotions. But risk tolerance is a key in determining your investment style. If you’re willing to take on more risk, you have the potential for greater gains. But you could also lose a lot of your investment money.
    • Quote (P. 167): “If you’ve decided you’re truly a risk-tolerant investor, and you intend to invest accordingly, remember the factors that will help you to stay the course when the markets test your mettle: Hold a balanced, well diversified portfolio. Control your costs. Keep on saving and investing. Time will be your ally.”

Ch. 12: Some Advice on Financial Advice

  • Using an Advisor — You can fairly easily manage your own money and investments with a little bit of effort, but there are times where it makes sense to hire a financial advisor. When you bring on an advisor, make sure you conduct your due diligence and make sure you fully understand the compensation plan. A few scenarios that may call for the help of an advisor include:
    • To deal with a major life event
    • To seek reassurance 
    • To deal with a complex issue
    • To manage your retirement years effectively 

Ch. 13: Buy-and-Hold Really Works

  • Buy-and-Hold > Short-Term Trading — The buy-and-hold strategy is the way to go. It keeps things simple and allows you to live your life without having to manage your investments daily. The key is to do your research, buy good companies, and then hold them for the long haul. Dollar-cost averaging is a good buy-and-hold strategy once you’ve identified a strong fund to invest in. 
    • Quote (P. 179): “If you’re determined to succeed in investing, make it your first priority to become a buy-and-hold investor.”
  • Short-Term Trading — Short-term trading is speculating. It’s very difficult to time and predict the market. Taxes and costs also quickly tear into your investment. Many brokerage platforms have marketed short-term investing as a “game.” It’s not a good strategy. 
    • Out of Market — Another disadvantage of short-term trading is being out of the market for a period of time. Market rallies can really boost your portfolio, but if you’re constantly pulling your money out, you may miss a surge.
      • Quote (P. 187): “Missing the six best months of the broad market’s performance over the 2010-2019 period would have reduced your average annual investment gain by nearly 40% — 8% instead of 13.4%.”

Ch. 14: Time is Everything

  • Time = Your Friend — Time is one of the most crucial elements of success in investing. Get as started as soon as possible and save/invest as much as possible. When your time horizon is long, you can take more risks and your wealth has time to compound and build significantly over the years. You can afford some down years in your portfolio if you have a long period of time ahead of you. 
    • Quote (P. 191): “By choosing sound investment vehicles and staying with them for the long haul, you’re almost certain to make money, thanks to the accumulation of reinvested earnings along with whatever stock appreciation occurs.”
      • Takeaway — Do your homework, select good companies with solid growth potential to invest in, and hold them through thick and thin over for the long haul. 
    • Ex. 50 Years — A one-time investment of $6,000 in a tax-free account, left untouched to compound at 8% per year, would be worth $281,410 after 50 years. 

Ch. 15: Routine Maintenance for Your Portfolio

  • Rebalancing — Rebalancing your portfolio every so often is important. Rebalancing is the process of getting your asset mix back into place. Over time, as stocks gain or drop, your asset mix will change. If you originally had an 80% stock-20% bond mix, the percentages will shift over time depending on how the market performs. The point of rebalancing is to get your asset mix back into alignment and manage your risk, not to maximize your returns. Some tips for rebalancing include:
    • Rebalance on a regular schedule (annually works well)
    • Rebalance only if your asset mix has strayed away from its target by more than 5 percentage points
    • Rebalance if a major life event has occurred 
    • Rebalancing is best in tax-advantaged accounts (i.e. Roth IRA, 401k, etc.) because you can sell without having to pay taxes
    • Rather than sell in a non-tax-advantaged account to balance things out, put your new investment money towards the asset class that is lagging behind
    • Rebalance as you get older and closer to retirement. As you get older, it’s important to shift your strategy and asset mix to reduce the overall risk of your portfolio. 
    • Quote (P. 204): “Remember the importance of your asset mix in determining your investment returns. You originally decided on your asset allocation plan for specific reasons, one of which was managing risk. Trust your own good judgment and force yourself to rebalance periodically. If you don’t, you could very well wind up with a portfolio that’s far riskier than you intended.”
  • Simplify Your Investing Approach — Some people buy way too many stocks or funds. You want to diversify, but don’t go overboard. Mutual funds/index funds/ETFs give you plenty of exposure — you don’t need more than 8-10 funds. You also don’t need more than 10-12 individual stocks. When you do, it becomes hard to keep track of your investments and make sure they are still worth your time and money. 

Ch. 16: Stupid Math Tricks for Smart Investors

  • Simple Investing Math — There are a few simple investing math formulas that can help you as you analyze investment opportunities. Some of these include:
    • Rule of 72 — Shows you how many years it will take for your money to double. Estimate your yearly rate of return and divide it into the number 72.
      • Ex. $10k Investment — If you have a $10,000 dollar investment and are considering a stock fund that you believe will return 9% per year, you can expect your money to double in about 8 years (72 / 9 = 8). 

Ch. 17: It's a Mad, Mad, Mad, Mad World

  • Bubbles — When people continuously invest in a certain asset and drive the price way too high. It’s important to not invest in something just because everyone else is. Every bubble eventually pops. 
    • Tulip Mania — In Holland in the 1600s, investors went wild for tulip bulbs. Some of the bulbs produced flowers with special colors. Nobody knew it, but it was because those certain bulbs had a disease. The prices for these diseased bulbs soared, to the point where they were selling for more than some houses. Eventually, people began to sell their bad bulbs and others followed suit. The bubble popped and bulbs later sold for less than an onion. 
    • Dot-com Bubble — Internet and technology stocks were the rage in the late 1990s. People had complete faith and trust in internet stocks and didn’t bother to do any research. People were investing blindly in companies that had no revenue and no earnings whatsoever. People were panic-buying because they were afraid to miss out on the nice returns these stocks were producing at the time. In 2000, the bubble popped and trillions of dollars of wealth evaporated as the price of these internet stocks came crashing down. 

Ch. 18: Why You May Be Your Own Worst Enemy

  • Behavioral Finance — The study of psychology on consumer and investor behavior. We are all victims of certain irrational biases and tendencies. These biases and tendencies can cause us to make dumb decisions. A few to watch out for include:
    • Assumptions — We like to make assumptions and connect the dots to complete stories in our mind. In reality, much of what we observe in life are random, independent events. You see a lot of assuming in investing.
      • Ex. Earnings — One investing podcast/website created a chart to show how much a company’s stock moved (as a percentage) on the day of announcing earnings for the past 10 years. The idea was that you would be able to predict how much the company’s stock would move the next time they announced earnings and therefore capitalize by trading the stock in a certain way beforehand. I’m reality, every earnings announcement is an independent event. 
    • Loss Aversion — We feel the sting of losses much more than we feel the joy of gains. We hate to lose things and people. As an investor, loss aversion can lead you to make some dumb decisions when you look at your account frequently and see short-term losses, like holding on to a loss for too long in hopes that you’ll “get back to even.”
      • Quote (P. 230): “If you are a long-term investor, you shouldn’t permit this instinctive aversion to loss to cloud your judgment. In investing, realize that you’ll win some days and lose some days, but if you stick to the prudent principles I’ve been discussing in this book, you’ll win in the long run.”
    • Paralysis By Analysis — When faced with too many options, we have a harder time deciding than if we were presented with fewer options. 
    • Herding — When we all follow the crowd without doing our own independent research before making a decision. Bubbles are caused by herding; we see what other people are doing and jump on the bandwagon. 
    • Halo Effect — If we like the CEO of a company, we assume the company is well managed and will be a great stock to invest in. In reality, you need to look at all factors, including the company’s financial statements. 
    • Anchoring — When we get attached to a point of reference and ‘anchor’ our opinions, judgements, and expectations to that reference point. 
  • Taming Yourself — It can be difficult to overcome our biases and tendencies sometimes, but sticking to the principles described in this book will eliminate most of the issues. These include:
    • Make a conscious, deliberate decision about risk and reward when you construct your portfolio
    • Be a buy-and-hold investor
    • Keep an eye on costs
    • Let time be your ally
    • Stick to your investment program in good times and bad

Ch. 19: Bear Markets Will Test Your Resolve

  • Bear Market 🐻 — When the stock market drops by 20% or more. A market correction is a drop of 10-20%. Bear markets are a normal part of investing and should be expected. They are usually caused by normal business cycle fluctuations. You don’t need to make any drastic corrections during a bear market — you need to keep perspective and ride it out. If you are young and have a long time horizon ahead, bear markets are actually a good thing.
    • Bear Market History — Over the last 65 years, bear markets have occurred once every five years on average. They have lasted a little longer than a year on average. The worst one ver occurred from 1929-1932, when stocks dropped 83%.
    • Bear Market Timing — The worst time to run into a bear market is at the end of your investing life when you are older. A bear market can wipe out a lot of your wealth and, because you’re older, you don’t have the time horizon to recover. This is why you need to shift your asset mix away from risky stocks and towards safer bonds and money market funds when you get older. You will still lose money in a bear market, but you will lose far less than if you were heavily invested in stocks. 
    • Quote (P. 242): “It may sound counterintuitive, but for people who are investing regularly for a long-term goal — not those who are drawing on their investments — bear markets are good things. If you are investing for retirement, and retirement is decades away, a decline in your account value is not a ‘real’ loss. What matters is what your account will be worth in 30 years, not 30 days or even 30 weeks. If prices are depressed, your contributions are now buying more shares at a cheaper price, so that’s more wealth for you in the future when the market has recovered.”
      • Takeaway — Dollar-cost averaging during bear markets allows you to pick up more shares at a cheaper price. Investing when the market is down is what you should do rather than panicking. 
  • Tips for Enduring Bear Markets — Usually, you shouldn’t do anything during a bear market. Just stick to your investment program. A few tips include:
    • Continue to Invest Regularly — Continue to commit to dollar-cost averaging. Bear markets give you a great opportunity to invest in companies and funds at cheaper prices. You should celebrate if you still have a long time horizon ahead. 
    • Maintain Perspective — Markets have always recovered. It may take some time to recover, but you are better off for investing in the stock market. Look at a bear market as an opportunity to pick up great companies/funds at a discount and ride the recovery wave. If you have decades of investing ahead of you, there’s no reason to worry. 
  • Hamburger Analogy — In 1997, Warren Buffet wrote about bear markets in his annual letter to Berkshire Hathaway shareholders. 

Ch. 20: Navigating Distractions to Reach Your Destination

  • Financial Media — You have to be careful with financial media. It’s important to stay up to date with what’s happening in the market, but you have to be selective with the news outlets you pay attention to.
    • Competition — The financial media space is very competitive, and the media will often spin things to get headlines and viewers. Some outlets will say almost anything to attract eyeballs. 
    • Agendas — Financial shows, written publications, and analysts all have an agenda. Whether it’s getting better ratings or supporting a company that has helped the outlet previously, there is usually an agenda behind what is being said by the media.
    • Forecasts — You can’t predict what the market will do, so any ‘expert’ analyst claiming to know what’s coming is fabricating.  
    • Quote (P. 250): “If you’re a long-term, buy-and-hold investor with a sensibly constructed portfolio, there’s no good reason to pay attention to reports on the short-term movements of the financial markets. What the market did yesterday and what people think it will do tomorrow simply do not affect your investment strategy.”
  • Quote (P. 251): “As Warren Buffett wryly noted in his 1990 letter to Berkshire Hathaway shareholders, ‘Lethargy bordering on sloth remains the cornerstone of our investment style.’”
    • Takeaway — There is really no good reason to make frequent changes to your portfolio. Short-term movements in the market should not affect you or sway you to make changes. Focus on doing your research, buying good companies/funds, and holding for the long haul. Warren Buffett was getting at that with this note. 

Ch. 21: Is the "Smart Money" Smart? Yes, but...

  • Venture Capital — An alternative investment in which money is raised and invested in small, start-up type companies that are just getting started and have a lot of potential. Venture capitalists pool their money and invest in these promising ideas to help the company and its leadership get off the ground. The risks are very high — less than 20% of the companies venture capitalists fund become profitable. But the upside is huge if one of the companies catches on and becomes successful. 

Ch. 22: Regrets? I've Had a Few

  • Sunk Costs — When the price of one of your stocks goes down, it’s important to resist the urge to not sell purely because you want it to “get back to even.” If a stock’s price drops from $20 per share to $10, you have to forget the drop and decide if the company is still worth owning at $10 per share. If not, sell and take your loss before it slides further. If it is still worth owning, hold on. 
  • Remain Optimistic — Short-term losses, or gains, are fairly irrelevant if you are a long-term investor. Interim changes in your portfolio aren’t real — they exist only on paper until you sell out. If you’re not planning to tap into those assets soon, a decline isn’t a loss. Neither is a gain on paper an actual gain.
    • Quote (P. 272): “My own belief is that you should accept your mistakes and learn from them, and then get over them. Move on with a sense of optimism and confidence. That’s a habit that the best of professional investors learned early on and keep front and center for their whole career.”
      • Takeaway — If you lose money on a stock, it’s not the end of the world. Try to prevent it from happening, but understand that these things can happen. A couple of losses over a lifetime of investing isn’t uncommon. 

Ch. 23: Getting to Boca

  • Evaluation — In the end, investing is about making money, building wealth, and getting to your financial goals. Don’t get obsessed with “beating the market” as many people do. If you’re making money steadily, you’re doing the job well. 
  • Relative Fund Performance — All funds are required to give shareholders a look at relative fund performance, which is a measure of how the fund performed against the broad market (i.e. S&P 500 Index) and a different, comparable fund. This measure allows you to easily compare your fund and see how it is performing. 
    • Short-Term Returns Are Irrelevant — When looking at the performance of a fund, remember that short-term results aren’t very important. Look at 5 and 10-year results instead because those give you a better look at how the fund is trending. Any fund can do well over a few weeks or a year if a few of its stocks had an unusually good year; it’s the long-term, consistent results that matter most. 

Afterword

  • A Summary — The lessons of this book can be distilled into the following 12 tips. 
    1. Develop a Financial Gameplan — identify your financial objectives and design an investment program that will help you reach those objectives. Be conservative in your projections about how fast your money will grow.
    2. Become a Disciplined Saver — Live below your means and consistently save and invest money from every paycheck you receive. 
    3. Invest Early — Make time your ally by investing as soon as possible, and keep contributing to your investment program on a consistent basis.
    4. Balance & Diversification — For balance, invest across at least two of the three major asset classes: stocks, bonds, and cash. For diversification, make sure you are not overly concentrated in any single company or industry.
    5. Control Costs — Avoid funds with high costs and expense ratios. 
    6. Manage Risk — Design your portfolio to suit your objectives, time horizon, risk tolerance, and financial situation.
    7. Be a Buy-And-Hold Investor — Do your research, invest in good companies or funds, and hold them through thick and thin for the long haul. 
    8. Avoid Fads — Don’t get tricked into buying a dumb investment. 
    9. Tune Out Distractions — Be careful with the financial media you take in. Check your portfolio once a quarter. If you become too obsessed with the news or your portfolio, you may be tempted to make unnecessary moves.
    10. Long-Term Perspective — There will be good times and bad times during your investing career. When times are good, be grateful. When times are bad, be patient. Through it all, don’t forget that your time horizon is long. 
    11. Rebalance — If you have a big life change occur, you may need to rebalance your portfolio from time to time. 
    12. Define “Enough” — Know when you have made enough money to meet your goals. Slowly reduce your risk when this has happened. 

Postscript

  • Interest Rates & Bond Income — As of the writing of this book (Q4 2020), interest rates were near zero. When interest rates are this low, it makes things difficult for older investors who want to be invested in safe bonds and rely on the income that bonds generate. Bonds are producing little income in this environment, which eliminates one of the great features of bonds and means more risk has to be taken on to compensate.
  • Quote (P. 299): “Do consider how much cash you need to sleep well at night and to meet near-term spending requirements. But, don’t hold onto more cash than you need. Put your money to work.”
    • Takeaway — Hold onto some cash for daily spending needs, but try to put the majority of your money to work. Invest it. Make your money work for you. When you do this over a long period of time, the rewards are big.Â