The Get Rich Slowly investment philosophy and strategy

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:

[J.D., Counting His Money]

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.

Here are the investing philosophies of several leading investors and financial thinkers.

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:

[My Top Holdings]

That gives me an overall asset allocation that looks like this:

[My Asset Allocation]

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.

Look for further installments in the “Money Boss method” series twice a week until they've all been transferred from the old site.

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Erik
Erik
2 years ago

That bitcoin comment… Hindsight is a beautiful thing.

Mrs. Kiwi
Mrs. Kiwi
2 years ago

I missed out on a few years of stock investing since I was clueless and scared. But fortunately when I did set up my IRA I found some good advice about low fee index funds! After watching my investments rise and fall with the market in year one I got a lot better at ignoring the news and my bouncy net worth. But it took a bit of time for me to trust this system!

Joe
Joe
2 years ago

That’s a really good investing philosophy. You can’t lose if you follow that guideline. You won’t beat the market, but you’ll beat most other investors.
I think we all made mistakes when we were young. I thought I could be the market too. Who doesn’t when they’re 25? The market returns 8%/year. It shouldn’t be that hard to beat. In reality, almost nobody can beat the market consistently. Good thing I finally learn that in my early 30s.

sequentialkady
sequentialkady
2 years ago

Arround 2002, I read some advice in an investment column that suggested setting aside up to 10% of your portfolio for “gambles” and investing the rest according to a plan. I’ve followed this strategy and I think it’s served me well. Yes, I’ve taken a bath on some of that 10% (Ballard Power, a gold index fund, a green power index fund) but several of my gambles (including Apple, Amazon, a small cap index) have paid off, and HOW. But, the key to making this a successful strategy is not the big winners, it’s that the other 90% goes into… Read more »

Jason@WinningPersonalFinance
2 years ago

I’m loving this series J.D.! I’ve been an index fund investor since the day I graduated from college in 2005 with a few small exceptions for actively managed funds. All of my experience doing so has been positive. I tend to nit-pick many personal finance articles that oversimplify things but this one just seems perfect to me. It’s great advice delivered well.

dh
dh
2 years ago

Roth IRA/VTSMX. If a person only used these 2 instruments, they’d be set for life. You could hang up your jock and hit the showers.

Maia
Maia
2 years ago
Reply to  dh

Don’t Roth IRAs have income limits?

CorpusCollosus
CorpusCollosus
2 years ago
Reply to  Maia

Yes, and when those limits are met I believe the author is suggesting VTSMX

Misty
Misty
2 years ago

I would love for you to do an article on investing for young ones. I’ve heard some things about Roth IRA’s for kids (and the possible negative side at college financial aid time) and would love to know more. Another important thing that I don’t see talked about much is can you gift an IRA portfolio to someone when they turn a certain age or do you have to die and leave it to them? So many questions about investing that go beyond the basics.

S.G.
S.G.
2 years ago

Sure, what everyone else says…

But really all I noticed was a picture of JD earnestly rolling pennies. Sorry, I couldn’t get past that.

Sober Finance
Sober Finance
2 years ago

Compounding truly is the 8th wonder of the world. Be smart, invest regularly in a diversified portfolio and turn off the talking heads on CNBC.

It’s funny, I’ve made dumb investing mistakes as well and I keep the near worthless stocks in my account as a reminder as well.

Derrell Huff
Derrell Huff
1 year ago
Reply to  Sober Finance

J D,

You talk about the magic of compounding. That is fine for you savings accounts, but
compounding for stocks is quite different. The way to increase you stock holdings is
buy dollar cost averaging and re-investing all your dividends and capital gains back
into the your basis to increase you number of shares that you control. Thanks for all
your suggestions, as I have almost been as low as you were at one time, but thanks to
self-learning and control I have now become very comfortable in my 15+ years of
retirement.

Bob at The Frugal Fellow
Bob at The Frugal Fellow
2 years ago

Wow, thanks J.D. This is great advice – I particularly appreciate your listing of specific stocks/funds for investing. I know that is something I struggle to grasp personally sometimes, so this is very valuable!

loka
loka
2 years ago

like me trying to invest in cryptocurrency but like late to enter the market because when December 2017 has the highest historical price, but I entered in January and bought a coin with all my assets, and that ignorance produces something where the investment result is exhausted because the market is getting down, I lost most of my assets and came out with a lot of loss

v1adimir
v1adimir
2 years ago
Reply to  loka

If it were easy, everybody would do it. 😉

foeiawj
foeiawj
2 years ago

The trick is not beating the market but beating inflation.

Kafui Athiogbey
Kafui Athiogbey
2 years ago

Get educated on multifamily apartments investing and start acquiring apartments through syndications or with your IRA accounts and you will replace your income in less than 5 years. Listen to Michael Blank, Joe Fairless, and Old Capital podcasts for apartments investing education.
If apartments scare you then invest in cash flowing rental properties. Go to biggerpockets.com for education on single family properties investing.
Just passing on what i know on the investing side good people. I wish you all the best.

Fred Johnson
Fred Johnson
2 years ago

Some good advice in this column. I use 4 Vanguard funds–Tot Stk Mkt, Tot Intl Stk Mkt, Tot Bond and Intl Bond. These are my core funds with around $6.6 million in them. I play around with individual stocks with another $400K, but eventually I’ll put this money into the index funds also. I was on welfare first 18 years of life, graduated from college with a negative net worth, zero savings and never inherited a dime. Been giving 10% of all income to charity for the last 25 years also. For the rest, I(wife and I) lived below our… Read more »

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