The Get Rich Slowly investment philosophy and strategy
As you spend less and earn more, you'll begin to earn a profit and save more money. Maybe at first you'll have a few dollars per month in surplus. Eventually, however, you'll find that you're saving 10%, 20%, or even 50% of your everything you earn.
The average person spends his surplus on whatever wants come to mind. Instead of using the money to get ahead, he stays in the same place. Or, worse, he falls behind by taking on debt. A smart money manager puts her profit to use by investing for the future.
At first, you'll pursue short-term goals.
- If you're in debt, get out of debt. Destroying high-interest debt offers the best possible return for your money.
- Build a cash reserve. It's smart to have money in a savings account to cover short-term emergencies.
- Invest in yourself. Remember: the more you learn, the more you earn. Increase your skills and education. Update your wardrobe and improve your health. Become a better you.
- Pursue your personal mission: fund college funds for the kids, pay off the mortgage, start a business, spend a year in southeast Asia. Use money as a tool to improve your life.
After your near-term wants and needs are satisfied, it's time to look farther into the future, toward retirement and Financial Independence. You know what that means, right? It's time to invest in the stock market!
Investing doesn’t have to be difficult. If you keep things simple, you can invest yourself and receive reasonable returns — all with a minimum of work and worry.
First, lets look at what not to do.
The Worst Investor I've Ever Known
Allow me to introduce you to the worst investor I've ever known. His name is J.D. Roth:
That's right, I'm using myself as an example of what not to do when investing.
You see, for a long time I didn't understand how the stock market worked. I treated it as if it were a casino. I picked a stock, put all my money into it, and crossed my fingers. I took risky gambles hoping to strike it rich.
Unsurprisingly, I lost a ton of money.
- During the late 1990s, I formed an investment club with some close friends. Each month, we contributed money and picked where to put it. We chose stupid, stupid stocks — whatever was riding high at the moment. When the tech bubble burst, so did our bankroll and our enthusiasm.
- In 2000, enamored by PalmPilot, I bought stock in the company that made the devices. I paid close to $90 per share. Just over a year later, the stock had lost 90% of its value. Oops.
- One of my friends worked for The Sharper Image. In 2007, the company was struggling and the stock was in the toilet. At dinner one night, my friend told me how management was trying to turn things around. Sounded promising, so I put my $3500 Roth IRA contribution into the company's stock. The company soon went bankrupt and my 2007 IRA contribution is now worth nothing.
- During the banking crisis, I invested in Countrywide Financial. “Countrywide is on your side,” right? Wrong. Yet another stock that went to zero.
Look, I was dumb, and I know it. Unfortunately, my story is far from unique.
My father bought gold at over $500 per ounce only to watch it fall to $300 during the 1980s. More recently, I have friends who've bought Bitcoins for $700. And readers often tell me about how they've lost by speculating in the stock market like I did.
In the past decade, I've mended my ways. I no longer treat the stock market like a casino game. Today, I take a different approach, the same strategy recommended by Warren Buffett and lots of other smart folks.
Before I share this strategy, however, let's talk a bit about philosophy.
The Get Rich Slowly Investment Philosophy
Your investment philosophy contains the core beliefs that guide your actions and decisions when saving for the future. It's like your money blueprint for the stock market. Without a defined philosophy, your choices are arbitrary. You buy and sell based on whim and emotion. When you have a clear ideology, your options become limited to strategies that fit your beliefs.
Here's how author Rick Ferri describes the difference between investment philosophy and investment strategy:
“Philosophy is universal, strategy is personal, and discipline is required. Philosophy acts as the glue that holds everything together. Philosophy first, strategy second and discipline third. These are the keys to successful investing.”
Back when I was doing stupid stock-market tricks, I didn't have a coherent investment philosophy. Today, I do. After a decade of reading and writing about money, I've come to believe that a smart investor should:
- Start early. “The amount of capital you start with is not nearly as important as getting started early,” writes Burton Malkiel in The Random Walk Guide to Investing. “Every year you put off investing makes your [goals] more difficult to achieve.” The secret to getting rich slowly, he says, is the extraordinary power of compounding. Given enough time, even modest investment returns can generate real wealth.
- Think long-term. It takes time — decades, not years — for compounding to work its magic. Plus, there's another reason to take the long view. In the short term, stocks are volatile. The market might jump 30% one year, then fall 20% the next. But in the long run, stocks return an average of around 10% per year (or about 7% when you factor inflation).
- Spread the risk. Another way to smooth the market's wild ups and downs is through diversification, which simply means not putting all of your eggs into one basket. Own more than one stock, and own other types of investments (such as bonds or real estate). When you spread your money around, you decrease risk while (counter-intuitively) earning a similar return.
- Keep costs low. In Your Money and Your Brain, Jason Zweig notes, “Decades of rigorous research have proven that the single most critical factor in the future performance of a mutual fund is that small, relatively static number: its fees and expenses. Hot performance comes and goes, but expenses never go away.” Warren Buffett bet a $2,222,278 that, because of high fees, an actively managed hedge fund cannot beat an average market index fund. He won the bet by a wide margin.
- Keep it simple. Most people make investing far too complicated. There's no need to guess which stocks are going to outperform the market. In fact, you probably can't. For the average person, it's much easier and profitable to simply buy index funds. (About which, more in a moment.)
- Make it automatic. It's important to automate good behavior so that you don't sabotage yourself. You want to remove the human element from the equation. I recommend creating a monthly transfer from your checking account to your investment account. And if you have a retirement plan at work, ask HR to max out your contribution via payroll deduction.
- Ignore everyone. You might think that a smart investor pays attention to daily financial news, keeping his finger on the pulse of the market. But you'd be wrong. Smart investors ignore the market. If you’re investing for twenty or thirty years down the road, today’s financial news is mostly irrelevant. Make decisions based on your personal financial goals, not on whether the market jumped or dropped today.
- Conduct an annual review. While it does zero good to monitor your investments day to day, it's smart to look things over occasionally. Some folks do this quarterly. I recommend once per year. An annual review lets you shift money around, if needed. And it's a great time to be sure your investment strategy still matches your goals and values.
This philosophy — which is based on years of research and experience — limits the number of investment strategies at my disposal.
The Get Rich Slowly Investment Strategy
How would you put the Get Rich Slowly investment philosophy into action? The answer is shockingly simple: Set up automatic investments into a portfolio of index funds, mutual funds designed to match the movement of the market (or a portion of the market).
It's easy to get started. Here's how:
- Put as much as you can into investment accounts — as soon as possible. Fund tax-advantaged accounts (such as retirement accounts) before taxable accounts.
- Invest in low-cost index funds, such as Vanguard’s Total Stock Market Index Fund (VTSMX) or Fidelity’s Spartan Total Market Index Fund (FSTMX).
- If the stock market makes you nervous, or you want to spread the risk, put some of your money into a bond fund like Vanguard’s Total Bond Market Index Fund (VBMFX) or Fidelity’s Total Bond Market Index Fund (FTBFX).
- If you want diversification with less work, invest in a low-cost combo fund like Vanguard’s STAR Fund (VGSTX) or Fidelity’s Four-in-One Index Fund (FFNOX).
After that, ignore the news no matter how exciting or scary things get. Once a year, go through your portfolio to be sure your investments still match your goals. Then continue to put as much as you can into the market — and let time take care of the rest.
That’s it. Seriously. Do this and you should outperform most other individual investors over the long term. (If you want more info on this investment strategy, check out my 5000-word article on how to invest.)
This strategy isn't just great for investing novices. Even market professionals endorse it. In his 2013 letter to shareholders, for instance, Warren Buffett outlined what will happen to his vast wealth when he dies. Most of it will go to charity; some will go to his wife. How will his wife's money be handled?
“My advice to the trustee couldn't be more simple: Put 10% of the cash in short-term government bonds and 90% in a very low-cost S&P 500 index fund. (I suggest Vanguard's.) I believe the trust's long-term results from this policy will be superior to those attained by most investors…”
Are there other investment strategies that might provide similar returns? Sure.
In the future at Get Rich Slowly, we'll explore value investing, dividend investing, and the Permanent Portfolio. Each of these approaches has merit. But each of these approaches also requires greater education, sophistication, and attention on the part of the investor.
Unless you know for a certainty that you have this knowledge, sophistication, and attention, you're better off sticking with index funds.
The Bottom Line
Do I practice what I preach? You bet! All of my money is in index funds and individual bonds. Here are my top four holdings as of today:
That gives me an overall asset allocation that looks like this:
I'm 49 years old and have 80% of my portfolio in stocks, 10% in bonds, and 10% in other investments. I do still own 1115 shares of now-worthless Sharper Image stock. I keep it to remind me of my past stupidity.
One of my personal goals over the next few years is to gain the knowledge and sophistication necessary to dabble in other forms of investing. (I believe I have the mindset already.) For now, I'm content heeding Warren Buffett's advice. It's served me well.
Exercise: Whether you're new to investing or already have millions in the market, it's important to define your investment philosophy. To start, create an investment policy statement, which is like a blueprint for your investments. An IPS will help you decide how much to invest in stocks and how much to invest in bonds. It'll also help you stay on course instead of trying to take shortcuts (by doing things like chasing hot stocks) or panicking when things fall apart (such as during 2008's market crash).
Note: I'm migrating old Money Boss material to Get Rich Slowly — including the articles that describe the “Money Boss method”. This is the eighth of those articles.
- Part one answered the question, “What is financial independence?”
- Part two looked at why you should run your life like a business.
- Part three explained how to write a personal mission statement.
- Part four explored the importance of saving rate.
- Part five showed why the best way to spend less is to cut back on the big stuff.
- Part six was all about how to earn more money.
- Part seven peeked at opportunity costs and conscious spending.
Look for further installments in the “Money Boss method” series twice a week until they've all been transferred from the old site.