Thoughts on Investing

 More Thoughts on Investing from David E Hultstrom

• You can do a lot worse than simply putting 60% of a portfolio into a total stock market index fund and 40% into a total bond market index fund.  You should have a high level of confidence that what you are suggesting is superior to that simple strategy before implementing it.

• Performance may come and go, but costs are forever.

• Never buy an investment that requires someone else to lose for your client to win.  Stocks and bonds have a tailwind (on average they make money), while derivatives are a zero sum game that requires someone else to lose money for you to make money.  That is unlikely to happen consistently.

• One of the worst things that can happen to you or a client is an early investment that wins big.  You will become overconfident of your abilities and proceed to lose much more in the future through imprudent decisions than you initially made on the winner.

• The purpose of fixed income in a portfolio is for ballast.  It is not there to increase returns, it is there to reduce risk, hence you should keep the fixed income portion of a portfolio relatively short term, high quality, and currency hedged (if using international fixed income).

• In reality, there are only two asset classes: stocks and bonds.  Or as I prefer to think of it, risky assets and safe assets.  Non-investment grade bonds are in the risky category.  Cash is just a bond with a really, really, really short duration.  The investment decision with the biggest impact is the decision of how to allocate the portfolio between those two buckets.

• In a bad market the value of risky assets will decline by approximately half.  This is to be expected.  When it happens it does not mean that the world is coming to an end.

• Your projections, regardless of the quality of the software used to generate them, have high precision (the numbers have decimal points), but low accuracy (you have no idea what the numbers actually are).

• The projections of market prognosticators have neither precision nor accuracy.

• It isn’t what you don’t know that will hurt you.  It’s what you don’t know you don’t know and what you do know that isn’t so.