7 most important investing lessons

最开始这篇文章是写给我们组的人，所以是英文的。这是我近3年看了40+本投资书籍，500+ podcast后总结的尽可能简单的原理了。由于大家应该都能读英文，我就把原文贴这里了。

TLDR — If you only have 5 seconds.
Step 1. Choose Vanguard 20XX target fund (For example, if you plan to retire at 2055, chose 2055 target fund) in your 401k.
Step 2. Contribute as much as you can.
Step 3. Rest and invest.

If you wanna take 20 mins to learn more…

Lesson 1 — Compound interest has nuclear power
Let’s see an example of 401k investing. We assume annually percentage yield (APY) is 8% [1], and we contribute $19,500/year for 35 years. So, the cost basis totally is $682k. Guess what's the total balance eventually? It’s $3.6M! It’s 527% greater on our cost basis!

If we use mega backdoor [2] in our 401k. We contribute $57,000/year for 35 years. Cost basis — $1.99M. Eventually, we get a $10M balance!

Now, you see the nuclear power of compound interest!

Note
1. Why 8% APY?
The average annual return since adopting 500 stocks into the index in 1957 through 2018 is roughly 8%. So, we use it as our APY reference.
2. What’s mega backdoor?
Google mega backdoor for more details. Basically you can contribute around 56k in your 401k.

Lesson 2 — Time could be your friend or enemy
We know the power of compound interest. But we should also know time is one of the key factors.
Let’s see an example.
Kelsey started to invest at age 30, she invested $10,000/years for 35 years, and then she retired. APY — 8%, Cost basis — $350k, Balance — $1.86M
Kai started to invest at age 40, he invested $20,000/years for 25 years then he retired. APY — 8%, Cost basis — $500k, Balance — $1.58M

Kai’s cost basis is 1.48x than Kelsey’s, but Kelsey’s balance is 1.17x than Kai’s! Time is Kelsey’s friend, but it’s Kai’s enemy.

Lesson 3 — Don’t timing the market. Instead, time in the market.
I think if someone can timing the market, he/she must be the richest person in the world. Then let’s see what Warren Buffett said: “People that think they can predict the short-term movement of the stock market or listen to other people who talk about (timing the market) — they are making a big mistake.”
Let’s see an example. If there’s a big crisis over the world. Everyone thinks the market will crash tomorrow. Kai has the same idea. He sells out his stocks, bonds, mutual funds, etc. He’s waiting to buy back them at the lowest price and get a big profit. Then Kai will face lots of questions. 1) If the market doesn’t crash tomorrow. Instead, the price is flat or increase. What should he do? 2) If the market does crash, should he buy now or wait for a lower price? 3) Which price is the lowest price? Is the market at the bottom now?

Here’s data to support it. In 1989–2018, if you miss 10 top-performing months (2.8% of the market time period) in the market, you will lose 59% profit, if you miss 20 top-performing months (5.7% of the market time period), you will lose 80% profit.
Time in the market is much more important than timing the market!

Lesson 4 — Stock index mutual fund is our friend
Why not stock? We see Facebook stock’s APY is 23.8% over the past 8 years. Amazon’s APY is 30% over the past 27 years. But S&P 500 APY is only 8% over the past 100 years. There are several questions here. 1) Could we predict which company is next Facebook, Amazon? 2) Could Facebook, Amazon keep the same growth in the next 10 years, 20 years, 30 years? 3) We only see the rock star stocks. But we didn’t see tons of stock price drop to $0! Like Enron, MoviePass, etc.

Here’s Warren Buffett told us “Invest 90% in a low-cost S&P 500 index fund, with the remaining 10% to be invested in short-term government bonds.”
We all want to beat the market and forecast another Facebook, Amazon, Apple. But beating the market truly hard. As I know only few investors made it over the past 20 years.

Lesson 5 — Diversity is the only free lunch
Don’t put all eggs in one basket. For example, the S&P 500 stock index mutual fund is great diversity for the US stock market. If Facebook drops 10%, the S&P 500 only drops 0.185%. Because Facebook only occupied 1.85% in the S&P 500.


Besides stock, we could also add Bond to increase diversity. Here’s a risk/return for bond and stock combination. If there are only stocks in our portfolio. It’s super risky (17%). But if we add 30% bonds, the risk will drop 4%, but the total return just drops 1%. That’s why Warren Buffet says “10% to be invested in short-term government bonds.”

If we take the whole world as diversity. Here’s US stock and International stock allocation chart. 70% US/30% International stocks beat 100% US stock without increasing risk.


Lesson 6 — One-click solution
We have talked so much about investing theory. Is there a one-click solution in our 401k? Yes, it’s Vanguard target retirement 20XX mutual fund. For example, I plan to retire in 2055. Then just select Vanguard retirement 2055.
Here are some reasons.

Diversity

• Vanguard target retirement 2055 is actually composed of 4 mutual funds.
• Vanguard total stock market index fund — 54.4%
• Vanguard total international stock index fund — 35.3%
• Vanguard total bond market index fund — 7.3%
• Vanguard total international bond index fund — 3%
  

It takes both US stock and International stock market into consideration, but also add US bond and International bond into the portfolio. Buy it like buying the worldwide stock market and bond market. Great diversity!

Low cost
Why does management fee matter? Let’s say we have 2 funds, they have the same performance every year — 8%. Fund A fee is 2%, but the fund B fee is 1%. So, actually, A’s APY is 6%, and B’s APY is 7%.
Even 1% matters!
If we invest A for 35 years and $10,000/year. Final balance — $1.18M.
Same for B. Final balance — $1.47M.
The difference is $0.29M!
What you gave mutual fund company is what you lost.
Vanguard target retirement management fee is only 0.09%! It’s 80% lower than the similar funds.

Rebalance
Another great benefit of this fund is it will automatically rebalance the percentage of sub-funds for you.
Why rebalance is important? For example, we hold 90% stock, 10% bonds. Then the stock market reaches another high record. Now, 95% is stock, 5% bond. Then we will have a higher risk since the stock market is too hot. Rebalance is resetting the percentage to the original one. We sell high for our stock and buy low for the bond.
Vanguard target retirement fund takes care of it for you.

Last lesson — Stay the course
We have learned enough investing theory. But when the market is bleeding, could we stay the course? When everyone is crazy about the stock market, could we stay the course? When someone says this time is different, could we stay the course?
Always focus on the long term instead of short term. Be patient, be optimistic, be cool. Everything will be fine in the future. The stock market will be fine in the long term. Investing is simple, but not easy.
Stay the course!

Last, if you want to read some books. Here are 5 books really interesting and easy to read.

• The Boglehead’s Guide to Investing — The fundamental for investing. Learn the most important things all you need in an easy way.
• The Bogleheads’ Guide to Retirement Planning — Talk about 401k, HSA, IRA, etc. The most valuable part is the section talking about how to withdraw money safely when you retire.
• How to Think About Money — We have learned enough about investing. But there’s rarely a book on how to use the money to maximize happiness. This book is the best for this topic. Don’t be slavery of money. Let money work for you.
• Poor Charlie’s Almanack: The Wit and Wisdom of Charles Munger — Everyone knows superstar Warren Buffett. But few know his partner Charles Munger who influenced Mr. Buffett profoundly. Such as reverse thinking. Like he said, ‘All I want to know is where I’m going to die. So I’ll never go there’.
• The Intelligent Asset Allocator: How to Build Your Portfolio to Maximize Returns and Minimize Risk — It’s the fundamental theory for diversity. It explains why diversity is so important. After reading this, you will proceed to the next level.
  

Happy investing!

ETF有更多税务优势，dividend是一方面
tracking cost basis是另一方面。在需要rebalance的时候，ETF如果选对lot disposal order，会在税务上更有利

target date对于退休这样的长期目标会比较简单。这是一个好的开始，但不应该是最终选择。每个人会有不同的财务状况，也有不同的退休规划。比如说，一个工作稳定的中产，和一个低收入者，他们的风险承受能力完全不同。一般target date都偏保守。实际上年轻的高收入人群，比如码农，风险承受能力比大盘还要高，同时账户里没什么钱。全股也是完全可以接受的。加债更好是情况是静态的backtest，如果是长期定投的话，因为一直有现金注入，年轻人其实不加债也没问题。这只是一种情况。实际上退休账户的配置应当和其他账号共同考虑。一个人要对自己的投资有整体的规划。

此外 target date在遇到意外的财务需求的时候，或者投资目标有巨大改变的情况，也比较难控制。这是缺点。

而且target date是mutual fund

所以一般性的理财投资，我不推荐target date。养老账户里，买这个没毛病。

楼主有没有空分享下reading list

Anker 发表于 2020-3-9 11:15
楼主有没有空分享下reading list

在最后我有分享5本书啊

Are you Kai Chen? https://medium.com/@ck1987/7-mos ... essons-c9e7cc0649a0