Dinner with the Diehards: A Chat About Investing
It's been a long time since I wrote about investing at Get Rich Slowly. I haven't abandoned the subject, but my mind has been on other things. Besides, I've been practicing what I preach. I've invested my money in low-cost index funds (and some bonds), and I never make a trade. Because I know it pays to ignore financial news, I have. Earlier this week, I peeked at my portfolio for the first time since May. You know what? It's doing just fine — even without me checking the balance every day.
Although I haven't been writing about investing, I've continued to further my personal education on the subject. Whenever the mail brings the latest issue of the AAII Journal — the publication of the American Association of Individual Investors — I read it. (The latest issue just arrived today!) I've also been reading books about investing. In fact, I've just begun David Swensen‘s highly-regarded Unconventional Success: A Fundamental Approach to Personal Investment; so far, it's fantastic. Look for a review when I return from Europe.
And the other night, I had dinner with the Diehards.
I attended the first meeting of the Portland Diehards two years ago, but I've only managed to make it to one quarterly meeting since then. On Tuesday, I made it a priority to meet the group to talk about investing over Chinese food. There were six of us: J.D., Loren, Kris (not my Kris), Ron, Van, and Gary. We each brought different experience and perspectives to the table, which made for an interesting couple of hours talking about investing.
Spouses with different investment goals
As we ate snow-pea chicken and hot-and-sour soup, we asked questions and shared advice.
For example, I asked how you should invest when you have a different risk profile from your partner. I, for example, am fairly risk tolerant; I'm willing to take chances in expectation of higher returns in the future. My wife, on the other hand, is not. She'd rather sock money into low-risk investments that also produce low yields.
Van suggested that we split the difference. That is, we should take half of our investment capital and invest it the way I want, and take half to invest the way my wife wants. So, if I want 80% in stocks and 20% in bonds, but she wants 40% in stocks and 60% in bonds, then we'd average that to a 60-40 split in favor of stocks. (Which, co-incidentally, is how my money is invested right now!)
Valuation, risk, and return
The group spent some time discussing the concept of risk. Loren is near retirement, and seems tempted to chase investments that are currently offering high returns.
Gary — who offered lots of sage wisdom throughout the night — asked Loren, “What rate of return do you need on your investment to fund the rest of your life? That should determine where you put your money. If you need a 10% return on your money to fund your life, then you need to be in stocks. But if you only need 2%, why risk it?”
Gary also noted that it's important to take valuations into account. That is, you shouldn't just blindly buy a particular investment vehicle, whether that's stocks, bonds, or commodities. Obviously, it's impossible to know whether an investment is going to go up or down in the short term, but you can make a pretty good guess as to whether something is under- or over-valued in the long term.
As a prime example, gold would seem to be over-valued now, just as housing was five years ago. And a little less than two years ago, it was pretty clear that stocks were under-valued. Gary's not saying you should chase whatever is tanking; he's just saying that if you've been making regular investments in gold, for example, but the market seems high (like now), then maybe it makes sense to suspend your investments — or even to sell.
I thought it was fascinating to listen to Van, who is trying to educate herself so that she can direct her own investments. She's new to this, and trying to learn as much as possible so that she can make her own decisions. “None of the financial advisors I've talked to really knows what's going on either, so I might as well do it myself,” she says. She figures that she'd rather make her own mistakes than pay somebody else to make mistakes for her. So, she's educating herself by reading books and coming to meetings like this Bogleheads gathering.
All of us agreed with her, I think, which probably isn't surprising. Loren said, “No matter who you talk to for advice, never forget that you are the boss of your own money.” I agree with this 100%. In fact, in May I published a guest post at Boing Boing about the importance of DIY finance. (No need to look it up; I'll be posting it here at GRS in a few weeks.)
Picking stocks — or not
Van is especially interested in learning how to pick stocks. Ron, the chief Boglehead in our group, cautioned Van, saying that from his experience, the default position should be to start with (and perhaps stick with) index funds. His argument is that if you're going to do anything other than:
- Invest in the entire market
- With the lowest possible fees
- With the most reputable dealer
Then you need to be able to state your reasons for doing so. You might have good reasons for not sticking with this default, but if you don't, and if you can't state them, then why take chances.
Once again, Gary shared the wisdom of his experience. “I started investing by picking stocks myself,” he told Van. “When that didn't work, I went to a full-service broker and paid him $400 a trade to pick stocks for me. That didn't work either — and it cost more — so I went to a discount broker to get my fees down. But I still couldn't match index funds. So, I gave up. I'd rather spend my time playing golf than picking stocks. Now I'm in index funds, in ETFs.”
We talked about a few other topics, as well, but this post is already running long. I'll skip the bits about certificates of deposit, investing in gold, and handling a windfall. But I do want to pass along a couple of quotes I liked:
- “Always be a saver,” Kris said. She stressed that no matter what your life circumstances, if you make sure you're a net saver — that you're spending less than you're earning — you'll be fine. (Her advice reminded me of the “Always Be Closing” speech from Glenglarry Glen Ross. Maybe I should do a version with “Always Be Saving” — and less swearing!)
- Gary is an advocate of boosting your income. “Your net worth doesn't go up from your investments,” he said. “It goes up from your earning power.” His point is that you're not going to get rich from the stock market — you're better off developing your human capital and mining that for money. “If it's important for you to accumulate a lot of money, you pretty much have to go into business for yourself,” Gary said.
Meetings like this are invaluable. They're a chance to exchange ideas with fellow investors, and to profit from their success and mistakes. I highly recommend finding a similar group in your area. There's no need to be intimidated. It's fine to show up and just listen if you feel like you don't have anything to contribute. I feel lost a lot of the time, but the more often I do things like this, the less lost I become.
This may be because I take notes. I filled my ever-present notebook with four pages of scribbles, including books to borrow from the library, websites to visit, and concepts to consider. (And, of course, writing this article helps to reinforce much of what I learned.) I already have December's meeting on my calendar. I'll be back for more Chinese food and more convesation with the Diehards.