Your Cheat Sheet For Smarter Investing
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If you save and invest the right way, you can just have an awesome retirement where you travel and have quality time with old friends and they come by and, you know, you can like drink champagne every morning. Okay, maybe not champagne every morning, but you get the idea. And now look, some of you are pretty on top of this whole saving and investing thing. And in this episode, we're going to help you go farther and learn some really high level stuff and

And others of you, you might be feeling a little bit more like this. I don't even know.

Where to investments. That's probably it, right? Those rare moments. If you even look at your retirement accounts, if you even have a retirement account, you see the tangle of graphs and ticker symbols of funds that somehow I guess you ended up with. International FID diversified AF cap world small cap. But I promise that you too, once you know a few basic principles, you're going to get this.

What? I mean, really get it. I need to learn this stuff better. That's okay. A lot of people do. We're here to help. This is your NPR Life Kit for saving and investing. And in this episode, we're going to talk to one of the greatest investors on planet Earth. He's going to teach us a smart way to invest in a mix of stocks and bonds and real estate. Call it the cheat sheet to setting up a great investment account. We're going to learn how right after this.

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My name is David Swenson.

I manage Yale's $29 billion plus endowment. I've done that for 33 years, and it's been a pretty good run. And David understates us a bit because the truth is David has a better track record than any other university endowment in the world. And he doesn't really talk to reporters very much like Carly at all, but he likes NPR, so we're in luck.

And David, I personally think of you as like the LeBron James of investing, even though your shoulders are not quite as large. And David's also written a book about a lot of this stuff. It's really good. It's called Unconventional Success. If you understand the underlying dynamics of the investment world,

you'll be able to do it yourself. Okay, the first big takeaway from David, you have to be invested in the stock market. Stocks over the long haul have had much better returns than bonds or other investments.

But that does not mean that it's a good idea to buy individual stocks like Amazon or Tesla or whatever seems like the hot company. Here is the dirty little secret of Wall Street. It's almost impossible even for professionals to pick individual companies whose stocks are going to outperform the overall market. 80 to 90% of mutual fund managers, 80 to 90%, they fail at this.

So if you're thinking like, oh, this is going to be fun. I'm going to read some investing magazines. I'm going to watch CNBC, get on my E-Trade account and pick some hot stocks, make some crazy money. It's basically a fool's errand. Think about these professionals who are devoting their careers to beating the market, have such a hard time beating the market. How can somebody who's casually spending a little bit of time on the weekends be

compete they can't for some reason i have this image of like me dressed up for like ultimate frisbee with you know a sweatband on my head and like some short shorts or something and i'm like running onto the football field with my frisbee and like the new england patriots are like they're in all their gear it's like uh-oh wait a minute um i'm gonna get crushed here you know i mean is that kind of the skill differential or the the preparedness differential that's out there

You know, Chris, that's a beautiful image. And I think it captures what I tried to say perfectly and much more eloquently. That may be a disturbing image for some. I'm not sure. OK, so David says don't buy individual stocks. He says what you should do instead is to buy the entire stock market using index funds. And we're going to learn what those are and why David likes them in a minute. But first, our next investing tip from David.

Is there like a biggest mistake that you see people make when it comes to investing? You know, Chris, that's a tough question. But if I had to pick one, I would say performance chasing. Buying what has gone up, selling what has gone down. When you do the math, that just doesn't work. Okay, now this is our next investing life lesson from David. Call it tip number two. This is really important.

You don't decide to buy a lot more stock after the market goes way up. And especially you don't sell stocks after they crash down. Now, you might be thinking, well, wait a minute. If stocks are in a free fall and they might fall farther, you know, I've seen this in movies, right? It's like sell, sell everything. But let's think about this in a different way.

All right, David, let's pretend that we just got on a roller coaster and it's going up the big clickety clickety thing and we're at the top and we start crashing down and everybody's screaming and it is terrifying and we're going around a corner and we're pulling G's and you look over me, David, and I'm trying to get out from under the bar and I'm telling you, David, I'm freaking out, man. I'm jumping off this thing. What would you say to me?

Sit down and shut up. Chris, don't do it. That's Bridget Madrian. She was a behavioral economist at Harvard for a long time, and she studies how our human impulses can lead us to make really bad decisions when it comes to money and investing.

Bad mistakes like selling after the market crashes. Losing money feels really painful. In the psychology literature, the kind of rule of thumb is that a loss is twice as bad as an equal-sized gain.

So how do you stop that painful feeling? Well, you think to yourself, I should get out of the market. But of course, the reason that Bridget and David really don't want me to jump off the stock market roller coaster after it plunges down is that if you sell your stock at the bottom, you are locking in those losses.

If you don't sell, you can ride that roller coaster right back up when the market recovers, which it always has eventually. But if you sell, you are left in a ruined heap at the bottom. That's exactly right. And when you sell in the midst of a crisis,

you could put yourself in a position where your portfolio will never recover. So if you're feeling really emotional about something, you're really excited or you're really afraid, that's probably not the best time to make a financial decision. ♪

Okay, so the stock market can be scary. You can make mistakes. Putting the money in a savings account might feel safer, but that's like sitting in a parked car. I mean, it's boring. And also you're just not going anywhere. The market though, honestly, the market is your rocket ship to make money over the long term.

That said, though, you don't want to put all of your money into stocks. There's stocks and bonds and real estate funds and beyond the U.S. There's foreign markets. There's all kinds of things you can invest in. How do you figure out the right mix of all these different ways that you can invest your money?

And a lot of you out there have questions about this. Hi, NPR. My name's Lindsay. I live in Medford, Massachusetts, and my husband and I are opening a bagel shop, which is awesome. I have about $200,000 in a 401k that I was kind of ignoring before, and now I want to make sure it's invested the right way. So looking for any...

So here comes the more advanced stuff. How should Lindsay and the rest of us actually be invested? OK, you're going to want to pay attention here. This is not only tip number three. This is the nugget of gold at the heart of this episode.

David Swenson did this really cool thing in his book. He made this super specific cheat sheet, basically, for how to set up a smart, well-diversified portfolio to earn a lot of money for later in life. And it's so good. Like when people ask me, like, hey, Chris, how should I invest my retirement money? And I'm like, well, you know, I'm a reporter. I shouldn't tell you exactly how to invest your money. But

Go look in David Swenson's book. It's on page 84. He just spells it all out. Here it is. The portfolio that I would recommend would have 30% in U.S. stocks. Next, he says 15% for stocks of companies in other developed countries. So Germany, France, Japan. Emerging market stocks would be at 5%.

These are the Chinas and the Indias and the Brazils. And then there's one that many people don't have in their portfolios, real estate. I have it at 20% allocation, and that's domestic U.S. real estate. And with the real estate, it's just like you can buy a fund with stocks in it. You can also buy a real estate fund.

OK, so all that stuff that David just said, it's a bit higher risk and higher return, as they say, which means that you should make more money over the long term. But there might be some more ups and downs. And then finally, the last part of David's portfolio is a lower risk cushion. 15% in U.S. Treasury bonds and 15% in U.S. Treasury inflation protected securities.

If you didn't catch all that, don't worry, we got you covered. It's all listed at npr.org slash LifeCat. Next, cover your delicate ears because we are going to talk about the worst four-letter word in investing. Yes, it's a four-letter word that starts with F.

It's fees. Fees. Just saying it makes me cringe. Do you know what fees you're being charged? No. This is Lindsay again from The Bagel Shop. Okay.

I don't know anything. So I didn't even realize that there were fees. So I have no idea. I guess it didn't occur to me that there were fees until like right now. So Lindsay is in good company. Many people don't realize that there are fees associated with their investments or if they know their fees, they have no idea what they are.

And the reason is because the fees are not charged as a separate line item. In other words, the companies who hang on to your big bag of retirement money, they don't jump up and down and say like, hey, here's how much money we're charging you in fees. Check out these big fees. And you don't have to pull out your visa card and pay them a thousand dollars that they already have your money. And they just quietly take their fees out of it. Yes, it's disclosed in the fine print, but that's often hard to see.

And then another thing happens. But when we do find out about the fees, our brains trick us into thinking that the math works out differently than it actually does. Our brains think, oh, a 1% fee or a 2% fee, that's like tiny. That's not bad. And 2% relative to 100% seems like a small number. But in an investing decision, the right benchmark is not 100%. The right benchmark is 100%.

What's the return you're getting on that investment? And 2% off of a 7% or a 10% return. 5%. Yeah, that's a big chunk.

Okay, so say over time with the mix of stock and bond funds, you're earning a 5% annual return on your investments. A 1% fee would eat up 20% of that investment return. A 2% fee would eat up 40% of that investment return. And that can have a huge impact on how quickly your money accumulates. And yet, many people like Lindsay are

don't even know what the fees are. With compound interest, it's even worse. But once you get this key concept, things click into place. They did for Lindsay. Even a 1% fee is not small. It's big. So then that's like 20% of your, what ideally should be what your increase is. You're like just saying goodbye to that. Bingo. What? Do you just learn all this over time? Is this just collecting information? I'm like, I need to learn this stuff better. Yeah.

One economist we talked to says a good target is that taken together, you shouldn't be paying more than 0.15% in annual fees in your mix of index funds and other investments.

Okay, this is our next big takeaway from David Swenson. Call it tip number five. He says that all the research shows that index funds are the way to go. In other words, passively managed funds. That's kind of a weird word, passively managed. But here's what I mean by that. You basically have two categories of funds that you can invest in.

You can either try and beat the market by investing in an actively managed fund. Now, those are what you think of as a typical mutual fund where there's some fund manager and he's wearing fancy shoes and wearing a suit and he's actively picking a bunch of stocks like IBM or Coca-Cola. And he's hoping that he'll put together this little group of stocks and that they're going to do better than the overall market.

And that sounds OK, maybe. But remember that David says about 80 to 90 percent of the time, they're not going to be able to do that. They're not going to be able to beat the market after you factor in the fees that they're going to charge you for their efforts. Or you can try and match the market with an index fund.

Broad-based index funds are designed to mimic market returns at low cost. And here's the thing, an index fund doesn't pick stocks because it thinks that they're going to do awesome. It just blindly buys an index. And all that means is it's just a list of stocks. It's just blindly buying them. Like the S&P 500, that's just a list of the 500 biggest U.S. companies.

And at its heart, a broad-based index fund. This is very cool. What it does is it lets you own a slice of all of corporate America at a super low cost.

And if you think about that, you get to bypass all of the Wall Street middlemen and the brokers and the people trying to charge you big fees. And some guy calling you saying, you know, hey, I've got this great stock tip. You know, you should buy this. You should buy that. And when you look at the history, the overwhelmingly right choice for investors is to take this index fund approach and you'll be far better off than with the actively managed alternative.

David says there's one other big piece of advice that he gives people. He says there's one major investment firm out there that is different from all of the other ones because it's structured basically as a nonprofit. The best advice I can give to people that are looking to put together a sensible investment program is to

is to go to Vanguard. And David says this is kind of awkward, right? Because he doesn't want to plug any one financial institution, but he says it's just the way it is. Vanguard's founder, Jack Bogle, he's like the George Washington for this low-cost index fund investing revolution. He set up this company in this nonprofit-style way with a mission to give people a range of index funds and advice that's in the customer's best interest. And David Swenson says, look, people should know that. I mean, look, I wish there were

20 not-for-profit organizations out there that were serving investor interests, but there aren't. Okay. Our next big investing concept from David, tip number six, balance is important. Now, have you ever driven an older car where one of the tires is out of whack and it's like wobbling and it's herky-jerky and things just aren't feeling quite right?

I work in public radio, and especially when I was first starting out, I actually owned cars like this and drove them for longer than I should have. It was probably dangerous. But that same sort of thing can happen to your investment portfolios.

So periodically when things get out of balance, you have to fix it and put them back into balance. Absolutely. And you brought up an incredibly important concept in what you just said, and it's the concept of rebalancing. So think of that pie chart of investments that David described. You start out with the pie slices for stocks and bonds and real estate, and they're all the right sizes where they're supposed to be.

But then the world changes, right? I mean, there could be a trade war or trouble in Europe or foreign markets that they start. Things happen and stock prices go way up or down and bonds change, too. And those pie slices, they change size. So what you want to do is you want to get them back to where they're supposed to be.

And to do that, what you're actually doing is you're selling stuff that went up in value and buying stuff that went down. Selling what's gone up and buying what's gone down. And it's incredibly powerful. That's like the Hollywood stereotype 101 lesson of investing, right? Buy low, sell high. That, David says, is a good way to make money. And you don't even have to do this rebalancing thing that often. At least once a year. And...

Certainly after a big move in the markets, make sure that your portfolio is where you want it to be. And if you're in a retirement savings plan, some employers have plans that have an automatic rebalancing feature so that they will, you don't have to worry about it. They will do that for you if you sign up for it. What's a good mindset for people to have about investing? What's a good mindset to have?

You know, I think for most, it should be to compartmentalize. Do the work, put the portfolio together, forget about it until there's a rebalancing reminder on your calendar. Because obsessing doesn't help. And it's likely to lead to interventions that would be counterproductive.

Do what you need to do and then forget about it until you need to pay attention to it again. And I think it's important for people to realize that even though we'd like to be really rational when it comes to financial decision making, it's really easy to let our emotions take over. And that's when people make mistakes. So enjoy the weekend. Hang out with the kids. Have some fun. Let the money grow. Don't look at it.

Investing does not have to be hard. You can set yourself up for a nice nest egg for retirement by following a few simple rules. Here's David again with those key takeaways. Number one, be invested in the stock market. Don't pick your own stocks. Don't pay somebody else to pick them for you. Number two, do not jump off the roller coaster. That's how you get hurt.

Tip number three. Make sure that you've got a well-diversified portfolio. Tip number four, the F word. Be careful about fees. And number five, remember those passively managed index funds. They're really important. Make sure that you have low-cost, broad-based index funds. And lastly, number six. Rebalance your portfolio at least once a year. And once it's set up, let it work.

For more NPR Life Kit, check out the rest of the episodes in our guide. There's one episode about when to pay for financial advice. We'll talk about educating yourself and when you're being taken advantage of. So check that out. Make sure to check out the other Life Kit podcasts at lifekit.npr.org. And while you're there, subscribe to our newsletter so you don't miss anything. We've got more podcasts coming out every month on all kinds of topics.

Also, check out NPR's Your Money and Your Life Facebook group. We've got tens of thousands of people in there now all sharing questions and answers about all kinds of personal finance topics. It's very, very cool. Take a look in there.

And as always, as we wrap things up, here is a complimentary random tip, this time from Invisibilia's Hannah Rosen. Here is a tip I learned from a teenager, the captain of my son's cross-country team, on how to wash sneakers because teenagers know things. You wash them in cold water and then here's the tip. You dry them with newspaper stuffed inside. It keeps them from getting moldy and they keep their shape. It's a great tip.

If you've got a good tip or you want to suggest a topic, email us at lifekit at npr.org. I'm Chris Arnold. Thanks for listening.

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