Your Cheat Sheet For Smarter Investing
Life Kit: Money
Deep Dive
Why should investors avoid picking individual stocks?
Picking individual stocks is highly risky and often unsuccessful, even for professionals. 80-90% of mutual fund managers fail to outperform the overall market. For casual investors, attempting to pick stocks is essentially a fool's errand, as they lack the expertise and resources to compete with professionals.
What is the biggest mistake people make when investing?
The biggest mistake is performance chasing—buying investments that have recently gone up and selling those that have gone down. This strategy doesn't work mathematically and often leads to poor investment outcomes.
Why is it important to avoid selling stocks during a market crash?
Selling stocks during a market crash locks in losses and prevents recovery when the market rebounds. Historically, the market has always recovered, so staying invested allows you to benefit from the eventual upswing.
What is David Swenson's recommended portfolio allocation?
David Swenson recommends a diversified portfolio: 30% in U.S. stocks, 15% in developed international markets (e.g., Germany, France, Japan), 5% in emerging markets (e.g., China, India, Brazil), 20% in U.S. real estate, 15% in U.S. Treasury bonds, and 15% in U.S. Treasury inflation-protected securities.
Why are fees in investing so detrimental?
Fees can significantly erode investment returns. For example, a 1% fee on a 5% return eats up 20% of your earnings, while a 2% fee consumes 40%. Over time, high fees compound and drastically reduce the growth of your portfolio.
What is the advantage of investing in index funds over actively managed funds?
Index funds are passively managed and designed to mimic market returns at a low cost. They avoid the high fees and poor performance associated with actively managed funds, where 80-90% of managers fail to beat the market. Index funds provide broad market exposure and are a more reliable long-term investment strategy.
Why does David Swenson recommend Vanguard for investors?
Vanguard is structured as a nonprofit and focuses on providing low-cost index funds and advice in the customer's best interest. Its founder, Jack Bogle, pioneered the low-cost index fund revolution, making Vanguard a trusted choice for sensible, low-fee investing.
How often should investors rebalance their portfolios?
Investors should rebalance their portfolios at least once a year or after significant market movements. Rebalancing involves selling assets that have increased in value and buying those that have decreased, ensuring the portfolio stays aligned with its target allocation.
What mindset should investors adopt for long-term success?
Investors should compartmentalize their investments—set up a well-diversified portfolio, rebalance periodically, and avoid obsessing over short-term market fluctuations. Emotional decision-making often leads to counterproductive actions, so it's best to let the portfolio grow over time.
- Stocks offer better long-term returns than bonds or other investments.
- Picking individual stocks is difficult and often unsuccessful, even for professionals.
- Index funds provide a way to invest in the entire stock market.
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