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Investing should be boring: The Magnificent Seven Rules

Investing should be boring

I love the one or two fund portfolio, a balance of global equity and bonds; simple, diversified, low-cost.

It’s also a bit boring; do nothing and leave it to grow through the magic of compound interest over multi decades. Set up your direct debit, turn away from your laptop, and go and do something else. Not the gamblers' excitement you get from trading; buying and selling shares weekly, but proven to excel over the years.

In some years it will feel like your portfolio is becalmed in an ocean of boredom, standing still for months, or even worse declining. It can be very tempting to move things around, move your portfolio into something that is performing well, try to beat the market. But again and again, statistics show that most people trying to time the market do not perform as well as those that simply do nothing.

Passive investing is not exciting and it can be even more challenging when it’s dull as dishwater.

If you want to have fun...

If you want some fun, go to a theme park!

Alternatively, have 90% of your savings invested in boring global index funds, and have a small pot to play the market; buy individual shares, invest in a managed fund, invest in crypto, or try other things. You might make a pot of money or you might lose it all, but this way, you don’t risk your future wealth.

You might decide to buy and sell individual shares with your fun fund; you can learn a lot about business, the economy, and what is going on with the markets by following individual stocks, but it is hard and it is time-consuming. Individual stocks are far more volatile than the overall market, they crash more often, they go out of business, and most underperform the market, as market gains come from a handful of big winners. Professionals spend all day specialising in individual market sectors and even individual shares, and it is still not enough to beat a simple index fund for most of them. Close to 90% of professional money managers underperform index funds over 10 and 20 year periods.

You could get someone else to play the market for you. Some people claim that active funds can capitalise on market crashes to beat the index; if you are going to pay someone an additional fund fee for actively managing that fund, you would expect them to outperform the market!

Well, actively managed funds tend to underperform passive index funds, even in difficult markets, and 2022 was no different. In fact, actively managed funds performed even worse than usual in 2022; 92% of active UK large-cap investing funds underperformed the index; 97% of active mid-stock UK active funds underperformed the index.

The Magnificent 7 Rules of Investing

1. Have a plan: Fail to plan, plan to fail. Work out your budget, spend less than you earn, increase your savings rate when you can, avoid bad debt. Write down your financial plan and commit to your strategy.

2. Start saving early: save automatically and pay yourself first. Spend intentionally and avoid lifestyle creep. By starting early you will be rewarded by the magic of compound interest.

3. Choose the right level of risk for you: a balance of equity and bonds suitable to your age, timescale, and goals.

4. Stick to low cost global index funds: trust in the great businesses of the world. Keep costs low with a global equity index fund diversified across all market sectors worldwide.

5. Never try to time the market: time in the market not timing the market. Buy and hold; invest for the long term. Stay the course; don’t panic in the face of bad markets. Market slumps are temporary, growth is permanent.

6. Invest effectively in ISA/LISA and Pensions: minimise tax and maximise free money.

7. K I S S: Keep it simple. You really don’t need more than one or two funds. Complexity often kills efficiency and investment returns.

Investing should be boring

At the start, you need to choose the level of risk or volatility you are happy with and the balance between equity and bonds, then allow this to play out over multi decades, with your monthly direct debits going in year after year and benefiting from the magic of compound interest.

Unlike other fields of endeavour like sport or business or even academia where the more you study or train, the more physical or mental effort you put in, the more chance that you will succeed and be rewarded; with investing, the less you do, the less you tinker, stop and start, move things around, try to play the market, the more chance that you will be successful. Numerous studies have shown this. Do nothing, invest in globally diverse index funds over long periods of time, this will win the race!

True, this is harder if your time horizon is shorter, that is why your portfolio should be appropriate for your age and personal circumstances. For me, as an older investor : ) my optimal portfolio looks something like a 60/40 portfolio; equities can enhance returns while diversification into cash and bonds can help mitigate volatility risk and provide ballast to the portfolio.

The higher expected returns in stocks come with more fluctuations and potential for losses in the short run. Bonds have lower expected returns but can provide income and a level of stability. Bonds allow you to stay invested in stocks or avoid worrying about short-term needs being met. They can also allow you to reinvest when stocks are down.

2022 was a bad year for Bonds

Bonds are for safety, stability, being able to sleep at night, for near-term liabilities where you don't have room for risk. But, this didn’t happen in 2022, both equities and bonds fell in value due to a mix of higher interest rates, slowing economic growth, and higher inflation following a global pandemic and a war in Ukraine. This is not normal.

The worst is probably past for bonds. Interest rate risk works in both directions. Last year when interest rates rose, long-duration bonds got hammered while short-duration bonds held up relatively well. The fall in bonds last year sets the stage for higher returns going forward – bonds should help your overall portfolio return from here.

Keep the faith

To be a successful investor you must have faith in the future of the great businesses of the world and know that things will turn out well in the end, as history has shown. All declines are temporary, the advance is permanent.

Maximise your tax advantages using the power of three: Pension, LISA, and ISA. When there is free money on the table, make the most of it!

Then you need to be disciplined and you need to be patient. Don’t keep looking at your portfolio all the time, let it be. If you have set your portfolio up in a logical and planned way, then you only need to review it annually, or if your circumstances change and your financial plan changes.

Look at long-term charts and remind yourself that investing returns in the short term can flow like the sea through numerous peaks and troughs, but over the long term the road has always been up.

Remind yourself that stagnant or even declining markets are a long term saver’s friend. The sale is on!; you can buy more assets for your money, effectively on sale until the market returns to normal.

The past 12-18 months do not really matter in the grand scheme of things, save and invest for another 20-30 years and you will struggle to see the wobble in your records.

Successful investing should be boring. It should be long-term in nature. It requires patience and discipline and the ability to ignore the madness of crowds.


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