Philadelphia Reflections

The musings of a physician who has served the community for over six decades

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Personal Finance
The rules of financial health are simple, but remarkably hard to follow. Be frugal in order to save, use your savings to buy the whole market not parts of it, if this system ain't broke, don't fix it. And don't underestimate your longevity.

Default Investing

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Busy people with growing families have little time for investing but will find their retirement crippled if they neglect it {bottom quote}
Dr. Fisher

Young people with busy careers and growing families have no time to learn the complex, constantly changing, and cut-throat world of active investment. What is described here is a formula for achieving lifetime growth of savings which is superior to what 90% of the population achieves. Its principles are simple: buy and hold will avoid transaction fees, and minimize taxes. Young people may not realize it, but taxes will eventually become their largest expense, and financial professionals value their services very generously indeed.

So, if you are going to buy, hold, and forget about it, you need to pick things whose value will persist for up to seventy years. That's not big stocks or little ones, familiar stocks or obscure ones. Only one stock, General Electric, remained listed on the Dow Jones Industrials for a century, while every other stock had its day and eventually either died or withered; that will probably also happen to GE. No, the investment which will last forever, never need to be sold, is the whole world economy. Because of computers, it is now simple to sell securities which represent a small piece of everything in the world. If one company eats another, well, you own them both. This approach will guarantee you an average success, half of the world will do better, half will do worse in good times and bad. But by minimizing fees and transaction costs, and minimizing taxes, you will do better than average. In fact, you will do better than 90% of people do, you will sleep better, never be bothered by telephone salesmen, never be cheated by people who never give a sucker an even break, never be in a panic about the stock market or the economy, and have more time for your business and family. True, you may have less to talk about at cocktail parties, but tortoise and snail is the motto.

Default investing is an important part of this. There's a lot of hesitation involved in accumulating cash savings and then stalling around choosing something permanent to invest in. That generates a lot of idle money, which creates a temptation for useless consumption, while the economy sails away from you, about one percent a month. Get the money into the world index fund, and then withdraw the cash you need for living expenses. Whether you realize it or not, you are creating a "bogey". That's slang for a benchmark. Go ahead, withdraw some money from the bogey and buy something better, but leave enough in the bogey to warn you that what you bought wasn't as good as leaving the money alone in the bogey. After a while, you will sell the loser and have learned a hard lesson. On the other hand, if you beat the bogey, that's just wonderful, but now you have the problem of when to sell this wonderful thing. Never, never, never sell it sooner than a year after you bought it because the extra taxes will kill you. When you do sell it, calculate your gain after taxes, and be sure to match up with the losers. If you are beating the bogey, you are likely to be in the top 5% of the investing world, and then maybe you are in the wrong business without any training for the new one you have chosen.

You are likely to hear talk about re-balancing. If you picked something which soared in value, your portfolio becomes unbalanced and you are taking some unexpected risks with having too much of a certain kind of thing. You will hear it said that you should re-balance by selling some of the good stuff and buying more of the "underweighted" sectors. For most people with busy lives and steady income, that is quite unnecessary. Do the rebalancing by buying more of the underweight sectors with your fresh savings derived from earning a livelihood. Instead of "re-balancing", you are urged to "maintain a balance", and the difference is whether or not you sell off some of your winners. It can be astonishing how far one of these innovators can go once it starts going. If you bought some schlock from a pump-and dump-broker, it's rather unlikely to keep rising for a year, so maybe you got a good one. But you should feel as I did when my seven-year-old daughter took her dime over to a restaurant's slot machine while we were touring through Nevada. "Please, God, make her lose."

Originally published: Tuesday, December 26, 2006; most-recently modified: Thursday, May 16, 2019