INVESTING VERSION 1.0

For years, investing was thought of as picking winning stocks, and doing it at the right time. This idea of how to invest has dominated our philosophy of what we “should” do. We will call this Investing 1.0 (and version 1.5 is where instead of doing this yourself, you hire a team of MBAs to do the research on which stocks are winners and when to get in and out of the market).

It turns out this is not the best way to invest. Academic research shows that most investors do better with a different approach. As you see above, only 17% of equity mutual funds that tried the Investing 1.0 approach were able to beat the market. In fact, most Investing 1.0 mutual funds did not even stay in business for the 15 years from 2002-2016.

NEWS MEDIA STUCK IN THE PAST

The financial news media, your high school economics teacher, and most of your neighbors still think investing is done this way.

Every day, Wall Street tries to sell you on them being able to pick the winners or know where the market will be.

VERSION 2.0: INDEX INVESTING

So if trying to find the next great stock or trying to guess where the market is going isn’t the best way to invest, what is?

Here is a typical 2.0 Investment (more commonly called Index Investing)—60% invested in the S&P 500 Index, 40% in Bonds: Here are some of the principles you accept when you move into Investing 2.0:

THE FUTURE IS UNKNOWABLE

Mankind has shown that we do a poor job of guessing where the stock market is going in the short term. Trying to use those guesses to profit, leaves us in the world of chance, not wisdom.

Rather, you can embrace that the market has gone up (capitalism works!), and your path is to profit from that overall, not try to game it short-term.

TO MAKE MONEY YOU MUST TAKE RISK

Safe money has not generated enough return, except to barely keep ahead of inflation. For example—as shown in the graph on the next page—a dollar in 1926 buys the same thing as $13 today. However, if we had invested that dollar in safe money, it would only be worth $21 or maybe $134 today—barely beating inflation.

Instead, had we invested in the stock market as a whole, we would have $6,301. What a difference! Had we been able to stay with a portfolio of small US companies, our dollar would be worth $20,544.