Many years ago, when I first started filming Win Ben Stein’s Money, my makeup artist was named Suzie. As Suzie combed, straightened, and powdered, I was often reading the Wall Street Journal or Barron’s or talking on the phone with my pal Phil DeMuth about investments. At least once a week, Suzie would set her jaw firmly and say, “I’ve got to learn all about this investing thing.”
I never knew quite how to respond, because it’s impossible to know all about investing. No one makes the right decisions every time—or even every year. Bill Miller, the brilliant manager of Legg Mason Value Trust, had beaten the S&P for 15 straight years, but recently lagged well behind it. Warren Buffett, probably the smartest investor of our time, could have pocketed billions by selling Coca-Cola when it was in the 80s and instead rode it down to the 40s. Brilliant hedge-fund traders, who typically make hundreds of millions a year, suddenly come up short and lose billions—and their jobs. It doesn’t happen every day, but it happens.
I’ll bet you know the feeling. Of watching a stock you sold triple in value in the years that followed. Of holding onto a stock you bought for, say, $15 that’s now selling for pennies. It’s happened to me, too. A lot. Which is why, over the years, I’ve developed a few simple rules to invest by. I consider them the Zen of investing, because if you work at them, they eventually become instinctive. You won’t have to think about them. You’ll just abide by them.
RULE 1: Instead of trying to time the market, try to tie it.
One day, I was lucky enough to meet Warren Buffett for dinner at a curious restaurant in Omaha called Piccolo Pete’s. As we settled in at our table, near the disco ball, I asked him for the best piece of advice he could give an ordinary investor. With a slight laugh, Mr. Buffett said, “Know your limitations.” The average investor, he explained, isn’t able to pick stocks that will outperform the market. The managers the average investor hires aren’t, either.
So unless you’re a top sensei yourself, don’t try to beat the market. Instead, cast the widest net possible using index funds. Buy a fund that tracks the S&P 500 or maybe even the entire U.S. stock market.
If you’re able to lock in the gains of the market—roughly 10 percent a year, historically—you will have accomplished a vast amount. If you want to duplicate the creativity of the master, Buffett, buy shares of his company, Berkshire Hathaway. It’s not a low-priced stock, but it has averaged a 25 percent return over the past quarter century. And its broad array of holdings makes it as diversified as some mutual funds. You are strongly cautioned that Berkshire Hathaway has had down years, and even long stretches of down years. And my pal Warren won’t be there forever.
So if you’re renting and considering the purchase of a home, or had thought about investing in rental property of your own, favorable deals are out there for the making.
And now for the disclaimer: You may be harder-pressed to find cheap deals in cities where growth is strong. All real estate markets are local, so be sure to do the research for your geographic region.
RULE 2: When you’re tempted to sell, buy.
When stocks are in the tank, your gut will tell you to bail, to move your money into less-volatile investments like bonds or money-market funds. It’s human nature. It’s also a huge mistake. When the market plunges—over days, months, and years—there are opportunities to make real money.
Buffett explained it years ago in an annual report: Whether a stock is priced low or high, he said, it’s ownership in the same company. So when the stock market puts a company on sale, that’s the best time to buy.
The inverse is also true: When the market is reaching new highs, you’ll be tempted to jump in with both feet. Don’t. This isn’t necessarily a time to sell, but assuming you’re investing on your own in taxable accounts, you’ll want to be buying less.
Important note: If you do all your investing within a tax-sheltered 401(k) or IRA, maintain or increase your contribution level no matter which way the market’s moving.
RULE 3: Collect sectors.
Your best friend as an investor is time. Your portfolio needs to grow slowly and sensibly. This means, of course, that you need to start saving early. For you stock stalwarts, keep in mind that the historical trend has been for the overall market to perform well in an election year, particularly in the latter half.
But you have another best friend, one you don’t spend a whole lot of time thinking about: diversification. You don’t want to be thrown for a huge loss by drops in any one sector. Make sure your holdings cover the entire investment field, so if “energy” collapses, you might be protected by gains in, for example, “financial services” or “health care.” This is another great reason to invest in an S&P 500 index fund: It comprises stocks from virtually every sector.
You need to be diversified by global region, as well. Mostly because of our country’s immense trade deficit, the dollar is likely to continue falling for a long, long time. That means that long term you can make money in foreign stocks and bonds denominated in local currencies, because your euros or yuan, for instance, will buy more dollars when you sell. Especially consider rapidly developing countries like China, India, and Russia—they’re likely to do well over the long run, although the ride is sure to be bumpy. Investing in these emerging markets is a great way to diversify your U.S.-weighted portfolio.
Luckily, there’s an index fund for just about everything, including the emerging regions of the world. Your ability to invest in Singapore, Brazil, and other countries from the comfort of your PC is a heaven-sent gift to the average investor. Give thanks. And buy, buy, buy.
RULE 4: Invest in yourself (involuntarily).
Chances are you’re putting away money for retirement automatically; your employer takes it out of your paycheck, pretax. If you ever want to amass a lot of liquid assets—that is, money you can spend today if you want—you need to set your savings to automatic, as well.
You can sign up for automatic savings with your bank and broker online. Have a specific amount taken from your checking account each month and put into an index fund, low-fee variable annuity, or diversified mutual fund. Arrange for a second deduction to be put into a foreign index fund. “Fire and forget,” as they say about the military’s smart weapons.
If you think you can beat the market consistently, good luck to you. It took decades—yes, decades—for these lessons to sink into my fuzzy brain. If it takes you only a few years, you’ll be doing great.
Suzie, I hope you’re listening.