The Ten Commandments of Investing

Here are my Ten Commandments (okay, there are 13) to guide your investing strategy and maximize your lifetime net worth.

1. Costs matter.

Small differences in investment expenses add up to large reductions in your long-term net worth. Incurring annual fees of “just” 1% — for mutual fund expenses, financial advisors, or anything else — will shrink your net worth by ~25% over 40 years.

Sweat every last percent of investment expenses.

2. So do taxes.

Maximize tax-advantaged accounts including 401Ks, IRAs, 529s, HSAs, FSAs, etc. But there is more you can do — tax-loss harvesting of unrealized losses, bonds in your retirement accounts (they have less favorable tax treatment than stocks), don’t use your HSA money until far in the future, timely Roth IRA conversions, back-door Roth IRAs, etc.

Don’t pay any more investment tax than is legally necessary.

3. Diversify.

The only way to reduce investment risk without reducing expected returns is through diversification. Not only is it “free” but it’s also simple and easy by using a total stock market index fund.

Use this magic trick.

4. Keep it simple.

Quantum mechanics is mysterious and counter-intuitive, investing isn’t. A simple and boring strategy can be better than a complicated one because (a) you’re more likely to understand, trust, and sustain it and (b) it more easily satisfies points 1, 2, and 3.

Target date mutual funds for retirement accounts are an example of this — they’re simple and auto-adjusting — as are stock and bond index funds. (See my next point.)

5. Complexity is not your friend.

Complicated financial products mostly benefit the salesperson who’s pitching it to you. When you don’t understand all the bells and whistles, that’s your tell to stay away. You’re likely being bamboozled with BS and well-hidden fees.

6. Mutual funds are helpful.

401K plans all use mutual funds as they satisfy my previous points. Forget about buying individual stocks; low-cost mutual funds are a better solution. They’re professionally managed, designed for individual investors, and many have low fees.

7. Focus on asset allocation.

This is the mix of stocks, bonds, cash equivalents (i.e., savings, CDs, money market funds), and any other asset classes such as real estate that makes up your investment portfolio. Stocks are riskier than bonds, bonds are riskier than cash, and commercial real estate falls somewhere between stocks and bonds.

An optimal asset allocation ensures you have the right level of investment risk for your life circumstances — age, income, savings, goals, risk tolerance, etc. Generally, younger and higher income people should be more equity-weighted (they have the luxury of being able to afford the investment risk and the time horizon to ride out the down years), while the opposite is true for older and lower income investors.

Crypto, metals, commodities, private equity, and venture capital are other asset classes with somewhat different risk/return characteristics. In my view, they’re not well-suited for nearly all individual investors.

Be mindful of your asset allocation and then find something else to angst about.

8. Don’t just do something, sit there.

Once you’ve sorted out the previous seven items, there’s not much left to do other than to leave things alone. If you’ve minimized fees and taxes, diversified, and optimized your asset allocation, then you can only make things worse.

When the stock market makes you jittery, try to do nothing.

9. No free lunches.

Other than diversifying, there’s no way to get higher expected returns without taking on more risk. (See #3.) That’s as true as gravity.

We all want the high returns of the stock market combined with the safety of bank CDs but that’s not how things work — you can have either but not both.

10. Market timing is for fools.

So-called technical analysts try to divine the future movements of the stock market by “analyzing” past stock charts, sun spot cycles, or retrograde orbits. As with astrologers and palm readers, they’re neither technical nor analytic, but they all can be a fun diversion.

No one knows what the future holds in the stock market or in life. The best time to invest is when you have the money.

11. Make compound interest work for, not against, you.

The power of compound interest can be your best friend (if you’re investing) or your worst foe (if you’re in debt). Make it work for you.

For example, consider the difference between 5% (current CD rates), 10% (average stock returns) and 20% (typical credit card interest rates). When you start with $100 and leave it alone for 20 years:

• at 5%, it becomes $265
• at 10%, it becomes $673
• at 20%, it becomes $3,834

Earn 10% rather than pay 20%.

12. Limit your foolishness to 5% of your net worth.

We all have hunches. Maybe health care stocks are a winner because you just had an expensive medical treatment that saved your life, or you love your Tesla, or your nephew made a killing with crypto, or you’re piling on to the latest meme stock on Reddit. Resist the temptation but if you must, limit these investments to 5% of your overall net worth.

If your hunch is a bust, it will be an affordable lesson. (See my next point.)

13. If it sounds too good to be true, it is.

When an investment opportunity seems to good to be true, it always is.

That’s your signal to take a hard pass.