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An Investor’s Manifesto: 20 Guiding Principles for Investment Success Print
Thursday, 18th June 2009 (by J.D.)This article is about Gurus, Investing
Knight Kiplinger is the editor-in-chief and a columnist for Kiplinger’s Personal Finance, one of the “big three” money magazines. In the June issue, Kiplinger offered an investor’s manifesto, a list of twenty guiding principles for making smart investment decisions.
Kiplinger’s manifesto is a great list, effectively summarizing mainstream investment theory on a single page. I liked it so much that I obtained permission to reprint it in its entirety. Here are the twenty points in Knight Kiplinger’s investor’s manifesto:
- I am an investor. I do not trade my assets frequently. That’s speculation, not investing.
- I am also a saver, fueling my investments with continuous savings from current income.
- I know that every kind of asset entails risk — even cash, which can be eroded by inflation.
- I know that higher returns entail higher risk, in every kind of asset.
- I accept those risks, but I mitigate them by owning a diversity of assets.
- I regard my home as a place to live, not as an investment. It is not a substitute for retirement savings.
- I have an investment plan and a plan for asset allocation, in consultation with a financial adviser.
- I invest regular amounts every month, in both rising and falling markets. I know I cannot gauge market tops and bottoms. If I receive a windfall — a bonus, bequest or gift — I gradually feed it into my regular investment mix.
- I don’t pour more money into hot markets nor completely cash out of plunging markets.
- I spread my investments among several asset classes, in a mix fitting my age and risk tolerance.
- My share of bonds roughly equals my age. I will allocate to stocks a declining portion of my financial assets as I get older.
- I rebalance my portfolio every quarter. If the stock market plunges, pushing my stock allocation way below its target percentage, I sell bonds and use my cash to buy stocks.
- I force myself to sell high and buy low by periodic rebalancing — just what is temperamentally difficult for most investors to do.
- I know that stocks are risky in the short run, so I hold in equities no money for which I have a likely need in the next three years.
- But stocks are not too risky in the long run. They have outperformed all other commonly-traded assets over periods of 15 years and longer.
- Foreign stocks account for at least 15% of my stock allocation. I believe that developing economies will enjoy much higher growth than the U.S. in the decades ahead.
- I never borrow against my stocks. Margin calls could force me to sell good assets at a bad time.
- I stick with my game plan. I do not check the value of my investments every day or even every week.
- I try to keep my cool when other folks are losing theirs.
- I remind myself often: I am an investor.
Do you disagree with any of Kiplinger’s mantras? Are there others you’d add to the list? (For example, I might include: “I buy low-cost index funds. I know that over the long-term, indexing beats the returns offered by most other investment options.”) Do you hold a set of principles that guide your investment decisions?
In April, I shared a similar document from billionaire John Templeton, who described his 16 rules for investment success.
[Kiplinger's Personal Finance: An investor's manifesto, reprinted with permission]
June 18th, 2009 at 5:14 am
I think #11 is a bit too conservative for me. I still have decades before retirement, so my portion of bonds is lower than Kiplinger’s recommendation.
I agree to add a guideline to have low cost index funds.
June 18th, 2009 at 5:40 am
Per the advice of my investment hero John Bogle, I’d add that I don’t peek at my portfolio more than once per quarter (and try not to even do it that frequently).
And, like you, I’d add that I keep my investment costs low by buying index funds.
June 18th, 2009 at 5:41 am
I would encourage a higher percentage allocated to foreign equities. That is where, I belive, most of the growth in the world markets will come from.
June 18th, 2009 at 5:51 am
“I believe that developing economies will enjoy much higher growth than the U.S. in the decades ahead.” - hell, yeah, I’m happy to the see truth being spoken, although this makes me wonder why it’s only 15% international (which typically amounts to only ~5% EM). For me I’m more than 50% EM, and I have been up spectacularly as of late.
June 18th, 2009 at 6:07 am
The best advice of all comes from Will Rogers: “Don’t gamble; take all your savings and buy some good stock and hold it till it goes up, then sell it. If it don’t go up, don’t buy it.”
June 18th, 2009 at 6:14 am
I am with @Laura on this one. I am 26 and have 5% of my investments in bonds, the rest in stocks(Majority International). Plenty of time for my account to flucuate up and down before I even ponder retirement.
Not sure about #12 either for the younger investors out there. This makes sesne for people trying to use the cash of their investments. I am of the loyal long term conservative investors, call me and index fund kind of guy.
June 18th, 2009 at 6:16 am
I disagree with some of them, but I was just thinking about this one, so I’ll note how I take issue with it.
I regard my home as a place to live, [Correct, if obvious]
not as an investment. [Wrong]
It is not a substitute for retirement savings. [Correct, but no single investment is]
My asset allocation plan includes real estate, and therefore as I own a significant chunk of my home, I am currently over-allocated in real estate, and the asset is not liquid, so I can’t re-balance. Any immediate solution to this problem is, in my view, worse than the problem itself. I’ll just have to keep building up my other assets until my allocation plan gets into line, which will take a few years.
Eventually, the equity I have in my home will be smaller than the amount I want invested in real estate, (One hopes because my other assets will have grown, and not because the value of my home has shrunk) I’ll be free to either buy more real estate, pay off more of my home, invest in something like a REIT, or any combination of the three. My plan, actually, is to invest in a REIT until its value is large enough for a downpayment on some land and then purchase that land. Plans can change, however, as this will all happen some years down the road.
It’s fine to say that a home is not ‘a substitute’ for retirement savings, though certainly owning a home outright will help when one reaches retirement age. Saying that a home is not an investment is just silly.
June 18th, 2009 at 6:44 am
I think #6 about hosue is not an investment is a really important point — especialy now, when a lot of people are in houses that are not worth what they are mortgaged for. In those situations, I wonder if it isn’t a good idea to try to pay off the mortgage early, and save some of the interest payments??
June 18th, 2009 at 7:12 am
There is no question at all that future growth is in the emerging markets.
It used to be that the emerging markets were risky to invest in; now I think it is much more risky NOT to be in them.
I am 100% outside the US.
Take a look at the best performing stock markets in 2009:
http://www.economywatch.com/stock-markets-in-world/world-stock-markets-best-performing-markets-2009.html
June 18th, 2009 at 7:13 am
#11 is the most questionable advice. Your asset allocation should be relative to your risk tolerance, not a hard and fast rule. Great post, nonetheless.
June 18th, 2009 at 7:14 am
Lists like this can be useful but are typically one-size-fits-all in nature.
Here is, without any doubt, the best number one for a list like this:
1. I am an individual: Generalizations can be good places to begin but they should be tailored to fit my unique needs and personality.
“Moderation, which consists in indifference about little things, and in a prudent and well-proportioned zeal about things of importance, can proceed from nothing but true knowledge, which has its foundation in self-acquaintance.” ~ Plato
June 18th, 2009 at 7:40 am
Years ago when people didn’t live as long and retired earlier than they do now, item #11 made sense. Now, not so much. I’m 46 and have roughly 25% of my retirement investments in bonds. When I hit 50 I’ll change that allocation to 30%, maintaining a subtract 20 from my age at that point.
As for #18? My god man, have you seen what’s happening to GE in the last week? Panic! Panic! Doom and gloom.
June 18th, 2009 at 7:45 am
Looking at principle 6 and 17, does that mean you should pay down your house before investing?
Your home is a place to live and not an investment, but you have to invest to buy a house. Now if you borrow money to buy that house, you then you have in essence invested in a negative fixed rate bond. So if you invest in the stock marked, before you pay that mortgage down you are in essence buying stock with borrowed money.
Also if you know someone has real good knowledge of certain parts of the marked and you trust their judgement. When they tell you to sell don’t keep you cool and sell. But when they tell you to buy then do your own research.
June 18th, 2009 at 8:52 am
I think it’s a good list. A house is not a place to live and not an investment is one that I have a minor quibble with. My wife and I recently purchased a duplex. We plan on living upstairs and allowing the downstairs tenant to stay put. This will produce income. Plus, if we decided to move or buy something else - we have the potential of renting both units and having both produce income. We approached this purchase as an investment. I think a lot of people do it this way.
June 18th, 2009 at 8:52 am
I read an article in the WSJ a few weeks ago that talked about how more financial planners are rethinking the buy and hold strategy previously recommended to their clients. I think these financial planners are making a huge mistake. I’m glad Kiplinger’s still subscribes to a more reasonable investment strategy.
I automatically rebalance my 401(k) every 6 months. I think that’s sufficient.
June 18th, 2009 at 9:00 am
To elaborate, buying a home can be an investment, but only if it has obvious potential to simultaneously provide you a place to live and produce income.
June 18th, 2009 at 9:00 am
I don’t agree with #4, #13 or #15.
#4 presumes a rational market. A decision to take on more risk should be compensated with higher returns. But it doesn’t work that way in the real world. In the real world, stocks were so overpriced prior to the crash that money markets were likely to provide a better long-term return. Those giving stock advice need to take into consideration that the Efficient Market Theory has been discredited by the academic research for decades now.
#13 advocates rebalancing. Rebalancing is sticking to the same stock allocation at times of wildly different price levels. No. We should be going with lower stock allocations at times of insanely high prices.
#15 is right only on average. Yes, on average stocks are always best in the long run. But we never are able to buy stocks “on average.” The historical data shows that when stocks are insanely overpriced they offer a worse long-term value proposition than far safer asset classes. At times of moderate or low prices this one is right on.
Rob
June 18th, 2009 at 9:20 am
Good list. #11 is too conservative for my tastes (greed). I’m 45. It works for John Bogle, so how can I argue? And isn’t #12 overkill? I would think rebalancing annually is fine.
June 18th, 2009 at 9:39 am
Higher return entails higher risk? That doesn’t sound like a good maxim. When you evaluate a stock to be worth X dollars per share and the market gets silly and prices it down to .1 * X dollars per share, I don’t see high risk in buying it. Risk comes from not understanding what you’re buying.
June 18th, 2009 at 10:05 am
I think it is basically good, but disagree a lot with #11. I don’t have any bonds. I don’t want them. I have a 30-40 year time horizon, and prefer to be 100% in stocks, and a big chunk of that is international.
When I get closer to retirement, I will probably have more low-risk investments than this rule recommends.
I think that the “glide paths” of target funds and asset allocation recommendations are way too gentle for my tastes, and assume that the markets change at a regular, incremental rate. I’m not advocating trying to time the market, just my own risk tolerance. Sometime in my late forties or fifties, I’m going to decide I’m not willing to take losses, and my asset allocation will nearly flip.
June 18th, 2009 at 11:00 am
@Daedala: Like you, I’m young and have a high tolerance for volatility. So I have a greater portion of my portfolio in stocks than would be suggested by the “age in bonds” rule.
Here’s my question for you: Your use of the word “flip” seems to indicate that you intend to make a pretty sudden switch from a high stock allocation to a low stock allocation. What happens if, when that time comes, the market has just gone through a serious bear market?
Will you still sell? Or will you stick with an asset allocation that–even by your standards–is too aggressive for your age?
My own planned approach is to stick with the gradual readjustment concept that’s suggested by the “age in bonds” rule–I’ve simply adjusted it to “age minus 20 in bonds.”
Thoughts?
June 18th, 2009 at 11:03 am
I like John Templeton’s a lot more, although that could just be because his are better written. The quarterly re-balance seems a bit often, but to each his own.
June 18th, 2009 at 11:50 am
As far as allocation I’m a big fan of Fail Safe Investing by Harry Browne. His Permanent Portfolio is the most robust I’ve discovered.
June 18th, 2009 at 1:53 pm
Here’s one…
“I invest at least 20% of what I earn, since I hope to spend at least 20% of my adult life in retirement.”
So… average life expectancy is ~70, people work from ~20 to ~60, that pretty much means you’ll spend 10 of 50 years of your adult life in retirement… or 20%
Sure, your assets appreciate over time, so you could get by with less. However, your medical bills will be much higher towards the end of your life… so it’s still a good rule of thumb.
June 18th, 2009 at 2:20 pm
I think rebalancing every quarter may be tax-inefficient in a taxable account. We’re happy with once a year on a pre-set date.
As for age in bonds, I think that’s a good rule overall, but I think it’s OK to violate if you are sure of what you are doing and can live with the possible consequences. For example, we had no bonds from 1990 to 2000 and did very well. We made the conscious choice to take extra risk while we were still young and loving our jobs. If it hadn’t worked out, we would have continued to love our jobs and would have about as much in savings as average people our age.
June 18th, 2009 at 3:15 pm
Let me start by confessing that I’m certainly not the target audience of this advice - I make my living as a “speculator” (a swing trader, to be exact) and so my portfolio changes every week, not every quarter or year.
But, I would like to point out that there is a certain parallel between the advice about investing for retirement and what was previously accepted wisdom about owning a home.
Just as once everyone was told that buying a home was a sure road to prosperity and security, now people are told that through the magic of low-cost index funds and asset allocation, we can all be assured comfortable retirements, or at the very least, long-term investment success. In both cases, it is not bad advice, until everyone starts to do it without thinking very much - one of the (many) reasons bubbles start in the first place.
Just as a thought experiment, ask yourself what would happen to asset prices and return on equity if all of a sudden *everyone* starts depending on them to provide 30 years of income? Just as home prices rapidly ceased to have any relation to their “value”, so, too, will asset prices or bond yields if everyone just dumps a set amount of money into index funds every month.
Although there were many, many factors driving the recent asset bubble in mortgage backed securities, one of the structural causes was simply too much money (globally) chasing too few yields.
June 18th, 2009 at 6:31 pm
As for investing in foreign equities, I am not convinced that gains from economic growth will not be diluted away through additional stock offerings and convertible debt. While there is no denying that there are significant opportunities abroad, I personally tend to stick with equities in countries that place adequate controls on their equity markets (e.g. western Europe and Japan). I’m still a bit vary of the BRIC countries and would rather own U.S. firms that have significant foreign exposure (Proctor & Gamble for instance).
June 18th, 2009 at 6:33 pm
The general advice is not as sound as it appears to be.
I agree that it’s the old ‘tried and true’ method, but that does not mean it will continue to remain good advice.
Did you know that about 100 years ago the very idea that individuals should invest in the stock market was considered to be outrageous? Today, owning stocks is considered to be mandatory.
in my opinion, the future is going to see another paradigm shift. Owning unhedged stocks is going to be outdated. That means portfolios must be protected against large losses. And that insurance must be inexpensive, or else no one will buy it.
That insurance is here today, but the vast majority of people who consider themselves to be prudent investors ignore it, and just don’t take advantage of an opportunity to be certain they don’t incur losses such as those that come with any bear market. Diversification only goes so far.
The answer: Conservative option strategies. Specifically collars for those getting started, and possibly more sophisticated strategies can be used later. But collars limit losses (and also limit gains) allow for decent profits and prevent large losses. I just don’t get it. Why do personal finance writers, bloggers, financial planners ignore options? Isn’t safety a very valuable concept. You all insure homes and cars, why not your stock portfolios?
http://blog.mdwoptions.com/
June 18th, 2009 at 10:17 pm
The easiest way to make a lot of money is to just work hard and make it through your JOB. The stock market giveth and taketh away ALL THE TIME. Trust me, I know very well.
The only thing i’ve got invested in the market is my 180K in my 401k and 150K in company stock. In other words, this stuff is basically mandatory investment which was worth 40% more last year. Everything else? I use the money to buy 4.2% CDs and rental properties.
June 19th, 2009 at 5:00 am
To ResortAtSqawCreekTAHOE
Maybe you have to buy company stock, but you can sell it every few months and maintain ownership of just a few thousand dollars worth. You don’t have to keep it.
Yes, the stock market taketh away. That’s why people who understand buy insurance - to get stop those losses.
June 19th, 2009 at 5:11 am
Count me as another investor who is wildly under-invested in bonds, according to rule #11. I actually don’t own any bonds at all, and I’m 33. I’ve got at least 20 more years in the market, and I have a high risk tolerance. I’m 100% in equities, and expect to remain so for at least another 5 years.
June 19th, 2009 at 9:39 am
I trade and look at the markets daily. Currently my portfolio is up 18-20%, I may be proclaimed as a speculative investor or not a ‘REAL’ investor. However I don’t think the rules are the same as when kiplinger wrote the book. If you had done the buy and hold philosophy over the past 2 years, you would have LOST 50% of your investments, on average every american has lost this, roughly the number being something like 50,0000 dollars on average. My best advice would be NOT to look AWAY, though this is contrary to what everyone says. If you can spot a trend of your stocks dropping something like 5-10% a DAY, dump that stock. You may miss a rebound, but you can always attempt to buy in on the 3rd-4th day at a lower strike price. The best tool to use are TRAILING STOPS based on %. If you pick a stock and make 5-8% place a trailing stop of 2-3% and you will always net a profit even as the stock continues upward, and this will save you if your stocks ever start a freefall of say ohhhh 50%!!! I’m sure JD has some good links on tools of trading such as trailing stops and limits. I looked into the investment indexs that were recommended on this site, but after MADOFF I would be reluctant to throw my money into anything other than a brokerage where I can see all my equities daily. The most important thing is that no one cares more about your own money than you do. If you followed kiplingers advice of buy and hold, you will be waiting a VERY long time for the rebound, when you could have sold off your assetts and bought back in for much cheaper with a higher return average. I know everyone is very busy all day and can’t always check on the markets, but if you don’t have the time to watch your money especially in these chaotic times I would just throw it into safer assets like TIPS and CD’s like JD has recommended. You may not buy a yacht, but you won’t be in the poor house either. So in summation to my long rant, BUY HOLD don’t look for 3 months….HORRIBLE idea. The market is moving much faster than it used to and if you aren’t watching, you’ll get BURNED.
Thanks,
Miles
June 19th, 2009 at 10:15 am
I would love to see some solid advice on BOND investing.
June 19th, 2009 at 11:43 am
@miles #33:
If interest rates rise from 3% to 4%, the value of your bond goes down (1% of 3% equals a loss of 33%) because nobody will want your 3% bond when they can buy a bond that pays 4%. You can hold your bond to maturity and the decline in value doesn’t matter to you… But, if inflation rises, the current low interest rates will eat your 3% returns away. Advice: Keep your maturities shorter than 6 months if you believe interest rates are likely to rise and/or if you believe inflation is coming. Short-term maturities means your returns will rise along with interest rates as you roll over to new bonds. (Of course, short-term bond funds do this for you if you have smaller dollar amounts to invest.)
If you don’t believe interest rates will rise, or that inflation is coming, then buy bonds and don’t worry because the good times will continue in spite of the current looming trillion-dollar deficits.
Simple.
June 20th, 2009 at 10:52 pm
There is a difference between investor and investment performance. In 2008 the US stock market, as measured by the S&P 500, lost 37.7%. But investors did even worse by losing 41.6%.
You are welcome to read why - http://www.peoplesfinancialadvisor.com/personalfinance/?p=32
June 22nd, 2009 at 5:15 am
#12, rebalancing every quarter, seems excessive. A sector or type of fund that is up this month may be back down in 2 or 3 months. In such a scenario, if you rebalance now by selling, you’ll just have to buy more in 3 months to rebalance again. For mutual funds, I think once a year is plenty. For other types of investments, rebalancing often doesn’t make sense. Peter Lynch states that rigidly and blindly rebalancing stocks is generally foolish and equates it to rewarding poor performers and holding back good investments without cause.
June 23rd, 2009 at 1:42 pm
I’m not an investor, but I want to learn to be– this article basically just taught me the most important things in being an investor; staying informed and being confident.
June 23rd, 2009 at 2:42 pm
I think the point of Rebalancing is often misunderstood. The whole reason we rebalance is to avoid chasing bubbles and to insure against busts. Rebalancing != selling! I have never sold a stock to rebalance my portfolio. I look closely at the most recent filings for the assets I own and determine MY valuation of them. If I feel that their price is low compared to MY appraisal of their value, and the diminishing stock price has caused an imbalance in my portfolio, then I buy more of it. The only reason you should ever sell is to capture a return. If you are comfortable with the AFTER TAX return of a sale, then by all means, pull the trigger!
June 23rd, 2009 at 4:56 pm
“outperformed all other commonly-traded assets over periods of 15 years ”
Try googling ‘STOCKS “over periods of 10 years “‘, you will find the standard has now shifted to 15 years because with the latest downturn stocks have lost money over the last decade.
This is called “goal-posting”, setting your goals to fit your data. The simple truth is that we have no clear idea what stocks will do over the next 15 years.
The US economy is facing worldwide competition. There are plenty of reasons to doubt it is up to the challenge. We have an aging population that is resistant to investing in the future.
June 23rd, 2009 at 5:12 pm
“I think the point of Rebalancing is often misunderstood”
I think that is an ironic statement since you seem to misunderstand the reasons for it. You may think your valuation of an asset is better than the markets, but most of the time you will be wrong. Trying to outguess the market is a losing proposition.
One point of rebalancing is to systematically sell high and buy low. It takes the guess work out of that process. How often you need to rebalance depends on how volatile the assets you own are and what your transaction costs are. People use two different strategies. One is to rebalance on a time schedule - usually annually. The other is to rebalance when your portfolio is out of balance by a certain amount.
There is a third, much easier way to keep your portfolio in balance. Buy a balanced index fund from someone like Vanguard. They will take care of the rebalancing for you as long as their mix meets your needs. There are also funds that shift the balance over time toward some target date. If you invest exclusively in these kinds of balanced funds, then you don’t need to ever worry about rebalancing. The trick is to make sure the asset mix of the fund you invest in really matches your needs.
July 12th, 2009 at 6:30 am
#17 — I think it is sometimes prudent and conservative to invest on margin. For example, Inertactive Brokers charges less than 2% for margin loans. If you invested all your money in a Bond Fund that yields 6% annually and your money is leveraged 2:1, you would yield 10% on your principal after paying your margin loan. The chances of defaulting on your margin requirement in such a fund is very low.