|Preston's Investing Axioms|
|My current thoughts on investing.|
|FeedbackBy Preston Hunt, 19 January 2005|
1. Do not use professional money managers.
- Annual fee will erode profits
- Probably won't outperform the market anyway
- Need millions of dollars in your portfolio before this can be worth it
- Possible exception may be "pay as you go" once-a-year advisors
2. Avoid actively managed mutual funds.
- Tons of evidence that (on average) they do not outperform index funds
- Exception may be small value funds.
3. Avoid loaded mutual funds.
- Why pay when so many no-load funds are available.
- Watch out for hidden 12b1 fees though
4. Buy individual equities judiciously, and even then no individual equity should be more than 4% of total portfolio.
5. Avoid stocks focused in the same area as your employer's
- Too many eggs in one basket
- In my case, already get my salary, stock options, and profit sharing through high tech, so should avoid any more exposure via direct stock ownership
6. Percentage of bonds in your portfolio = Age-20 (round down to nearest 5).
- For example, age 30 - 20 = 10% bonds.
7. Put small cap funds (and anything with large turnover or dividend potential) into 401k or IRA to take advantage of tax savings.
- Assumes that your tax rate will go down in the future
- Put bond funds, REITs, and value funds here too.
- Watch out for high IRA or 401k management fees, which can erode the tax-free advantage quickly
8. Put large cap funds (and anything with low turnover) into regular investment accounts.
9. Diversify, diversify, diversify.
- Historically the US market has performed best
- But who knows what's to come
- Get a little coverage for Europe, APAC, and emerging markets
10. Believe the Efficient Market Hypothesis
- Current stock price already reflects all available information
- Probability that *you* can find out info that the average person doesn't know is very low (but it can be done)
11. Don't make investing decisions solely to save money on taxes.
- Most of the time I've done this, it has ended up costing me money
12. Always max out any available tax-free and tax-deferred accounts
- Includes 401k, Roth IRA
- See this analysis
13. Park your cash in a high-yielding account
- Local banks have terrible interest rates
- Check Bankrate.com's list of top returning money market accounts
To invest in the entire US market:
- MSCI US Broad Market Index
- Wilshire 5000
- VTSMX (or VTI)
- Russell 3000
To invest in big US companies only:
- S&P 500
- Russell 1000
To invest in small and medium companies only
- Russell 2000
- Wilshire 4500
To invest in the international market (everything except US):
- MSCI All Country World Index ex USA (includes emerging markets)
- MSCI EAFE (Europe, Australia, Far East)
- Vanguard Int'l Growth Fund (exp ratio 0.63%)