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April, 2012


For all or at least a portion of one's liquid nest egg, a no frills, lazy person's approach to investing success has much appeal. Of course, if one is into stock or mutual fund analysis as a hobby, this might change things, but the average investor already has "a life" and so does not have the need or desire to spend much time, energy, or thought managing a complicated portfolio. So, why should he or she? In fact, most of us would likely do better than the market by keeping it simple and doing the minimum.

The S&P 500 has probably had a total return of about 9.8% a year since World War II. There are no guarantees, but that or a little below it seems not unreasonable for the future too. Yet, with a few quite fundamental strategies, one can frequently exceed that kind of equity performance, even if not buying the advice of a professional.

In fact, the story is more dramatic than that. The average investor makes a few percent less a year than the market. By merely taking it easy, you can do better than the market and significantly better than a run of the mill investor! Those few percentage points of difference a year can add up to hundreds of thousands of dollars of advantage for one's retirement nest egg after 3-4 decades.

If making more money by doing and paying less sounds good to you, here are some basics steps toward that end:

1. Invest in no-load index mutual funds. In general, no-load funds, especially those that are geared toward replicating the performance of an index of stocks, take less out of your return for commissions and fees than do commission mutual funds or professionally managed funds. That means more, compounding year after year, is left over for you. But do not those managed and commission funds perform better than the no-load index funds? Actually, while there are exceptions, the net return of the commission (or load) funds is a little lower than that for the no-load funds.

In addition, while there are good and conscientious brokers and financial advisors out there whose recommendations beat the averages, at least 80% of the time investors who follow the advice of financial professionals do less well than if they had merely bought no-load index funds at the same time with an identical amount of money.

Other good alternatives to actively managed, commission-charging mutual funds are closed-end funds (CEFs) or exchange traded funds (ETFs) pegged to the market indexes.

2. Do not trade, or do so only with a small percentage of your overall portfolio each year. In general, those who trade stocks or mutual funds a lot, lose a lot. They pay too much in commissions, too much in lost opportunities, and too much in erroneously timing the market, selling when equities are already down, buying when they are already up, thus buying high and selling low. Instead, acquire good mutual funds, closed-end funds, exchange traded funds, or stocks, and hold them for the very long-term. Warren Buffett, probably the world's best equities investor, asked how long one ought to hold stock purchases, said his preferred duration is "forever."

3. We may have been taught when we were growing up to tithe, giving 10 percent of our incomes to a church, synagogue, or charitable cause. The same goes, as a minimum, for our saving and investing. It is best, as a rule, to reduce one's spending enough that he or she can put at least 10 percent aside for a rainy day or other short-term contingency, for medium-term goals such as buying a house or paying for kids' educations, or for longer-term targets, like building up a good retirement nest egg.

One can put up to $5000 of one's earnings a year into a retirement account. If doing well and making $50,000 or better annually, much or all of the "investment tithe" can be added to an IRA annually. (If one also has a 401K plan through work, additional tax-deferred funds can be set aside. And if 50 or older, one may contribute an extra $1000 annually to the IRA.)

On a dollar-cost-average basis (buying with the same amount at regular internals, such as the first of each month or the beginning of January each year), gains tend to be greater than just a buy-and-hold investment, since we thus add more shares when the market is periodically down. This can mean up to a 20% increase in one's average return. However, assuming distributions are not taken out early, a $5000 tax-deferred annual investment at "only" a 10% compounded yearly gain will assure one has a nest egg of about $905,000 after 30 years. Married folks with a couple incomes can often do even better and may well become millionaire households in the same period.

4. Boost your savings and investments by increasing the amount set aside whenever getting a promotion or a significant monetary gift. For the vast majority of us, this works far better than gambling on the lottery for enhancing the eventual size of a nest egg.

5. Otherwise, the "keep it simple" approach is easy as can be: do what you love, look after your health and that of your loved ones, enjoy nice hobbies, and hardly ever think about your investments. They will take care of themselves.

On the other hand, when one does have the urge to research and actively manage or "play around with" stocks, do so with just a portion of the total. One's passive investments can keep on working for you in both bull and bear markets. It can be fun then to see if you have skills sufficient over the long-term to really beat what the rest of the nest egg is doing almost automatically. If so, then it could be appropriate to raise the percentage one is investing in individual securities. If not, however, no need to tell anyone. It is no trouble then to quietly put that amount into the "keep it simple" assets too!


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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