Rick Ferri, host of the Bogleheads on Investing podcast, joins the show to talk about the three components of successful investing.
Listen now and learn:
- The importance of having a clearly defined investment philosophy
- The four stages of an investor’s philosophical journey
- The key ingredient to keeping a great investment plan intact
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Show Notes
My guest today is Rick Ferri, an early champion of simple investing using low-cost ETFs, who has published seven books on the topic over the course of his career. Today he offers hourly financial advice and hosts the “Bogleheads on Investing” podcast, which is part of the John C. Bogle Center for Financial Literacy.
In our conversation, Rick and I discuss the tenants of simple investing, including the three components of successful investing.
Here are my notes from the conversation…
The John C. Bogle Center for Financial Literacy (1:35)
The John C Bogle Center for Financial Literacy was created in 2012 as a place to aggregate all the teachings about low-cost, passive investing. It’s a nonprofit organization with well-organized links to all of Jack Bogle’s work as well as every video he ever did, housed directly on the website.
Rick is the host of their podcast, Bogleheads on Investing, and spent many years as President of the organization. They also have an annual conference that’s 100% educational and has no sales pitches.
The Importance of Having an Investment Philosophy (5:00)
Investors should have a clearly defined investment philosophy prior to even trying to build a portfolio. Being able to summarize your philosophy in one or two sentences is ideal, but many people would struggle to do that.
The thing I find interesting about an investment philosophy is that everyone has a unique journey, but those that are rigorous in their pursuit eventually see the brilliance of simplicity in investing.
Rick outlines this journey in three stages.
The first is darkness. We start as a blank slate, picking up little bits of information here and there. And so much of how we view the world outside of investing doesn’t really apply to how the world should be viewed from an investment perspective.
People try to pick stocks, they try to time the right moment to get into the market, they listen to people who they view as experts…and somehow we think that despite indisputable evidence that predicting the future is impossible, somehow people making predictions about money can do it.
Rick and I each share some of our own experiences as well as those we’ve observed.
The next stage we talk about is enlightenment. This is when you come to the realization that things aren’t right, that your portfolio isn’t doing what it should be doing.
Rick notes that people who reach this stage of enlightenment are often a bit frustrated because they’ve been doing it all wrong and realize they need to change, but they aren’t entirely sure how to do it. Philosophically, they are already where they want to be, but they want some validation and want to know what other blind spots they may have missed.
What’s sad is that people who reach enlightenment often come to the realization that they’ve been taken advantage of by their financial professional, which happens even at highly reputable firms. They wonder how people get away with giving out financial advice that isn’t in the clients’ best interests at all times.
The next stage is complexity. I think this happens just as much to financial professionals as it does to individual investors.
Basically, people do research to realize the benefits of low-cost, rules-based investing, so they keep doing more research and start discovering there are other strategies with backtests that show improvements to investment outcomes. So the well-read investor begins adding a bit of this and a bit of that as they consume more books and white papers.
All of a sudden you have a collection of funds that don’t really go together and don’t necessarily fit with a clearly defined investment philosophy.
The last stage is simplicity. Getting to this stage is a similar “aha” moment as the coming-out-of-the-darkness. Unfortunately, in my opinion, most investors don’t get to this place.
The more I learn about markets, the more elegant I find the nuances of what is generally a pretty simple solution.
Building an Investment Strategy That Puts Your Philosophy into Practice (27:30)
In general, Rick and I have similar investment philosophies: we both believe in low cost, we both believe that you can’t predict the future, we both believe in less is more, and we both believe in owning the whole market.
But applying that philosophy in practice is going to differ from investor to investor. People have different types of accounts, different sizes of accounts, different tax brackets, different risk tolerance, different time horizons, etc. And the best strategy for you might be different than for me.
Rick outlines the differences in strategy as structure, asset allocation, and individual selection.
Once you have a philosophy and strategy in place, the final component of investing success is discipline.
Discipline: The Ingredient That Holds Everything Together (30:30)
Investment success isn’t what happened last week or last year, it’s what happens over your lifetime. But when it comes to actually implementing a strategy that was built on top of a sound investment philosophy, people sometimes lose sight of the big picture.
Some people simply fail to implement their strategy, instead waiting for the perfect moment to start. But that is a huge mistake. Don’t worry about when to implement it, just do it now.
That’s why discipline really starts with implementation.
But once you get there, ongoing maintenance requires discipline. That doesn’t mean you can’t make adjustments. In fact, adjustments are going to be necessary. Maybe you get a large lump sum payout. Maybe you’re moving from one job to another. Maybe you’re retiring.
There’s always a need for adjustments along the way, but that doesn’t mean you abandon your investment philosophy or strategy – instead, you make changes in accordance with those things.
I really like the last thing Rick shares about discipline, which is that you have to keep learning. Read books, listen to podcasts, and do whatever it takes to remind yourself why you’re doing what you’re doing. That will help prevent you from slipping back into darkness again.
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Long-term investing made simple. Most people enter the markets without understanding how to grow their wealth over the long term or clearly hit their financial goals. The Long Term Investor shows you how to proactively minimize taxes, hedge against rising inflation, and ride the waves of volatility with confidence.
Hosted by the advisor, Chief Investment Officer of Plancorp, and author of “Making Money Simple,” Peter Lazaroff shares practical advice on how to make smart investment decisions your future self with thank you for. A go-to source for top media outlets like CNBC, the Wall Street Journal, and CNN Money, Peter unpacks the clear, strategic, and calculated approach he uses to decisively manage over 5.5 billion in investments for clients at Plancorp.
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