The Real 10 Commandments of Investing

Rob Carrick recently “gathered 10 of our favourite bits of investing advice, on topics ranging from stock-market risk to which mutual funds to buy” and called it the 10 Commandments. A commandment is “a command or order,” so something like “thou shalt not use the word commandment incorrectly” is a commandment. “Commandment” #10 is “Investors repeatedly jump ship on a good strategy just because it hasn’t worked so well lately, and almost invariably, abandon it at precisely the wrong time.” C’mon that’s not even a commandment! So what is the order here, that we should not jump ship on a good strategy that goes bad? or should we not use strategies? or should we abandon them at precisely the right time instead of the wrong time? The longer explanation does not leave things any more clearer, offering such advice as “ignore the slumps or use them as a buy-low opportunity,” or ” judge whether your fund manager has what Dreman calls a good strategy.” For what’s it’s worth, the only words of advice in there I thought were useful were Buffett’s (use low-cost indexes) and Malkiel’s (less fees are better).

A while ago a guy named Alan Haft (he wrote a book called “You can never be too rich”) made up his own 10 Commandments of Investing and it’s been in my drafts folder ever since I saw it. I think he sums up the most important things that people should do with regards to investing, they are well written, and they make sense. Here they are:

  1. Stick with the indexes
  2. Watch those fees
  3. Create a bond ladder
  4. Diversify
  5. Watch your money
  6. Don’t rush in
  7. Don’t take the risk if you don’t need the return
  8. Get out if something isn’t working
  9. Understand tax consequences
  10. Keep it simple

Here are some highlights:

1. Stick with the indexes
Leave the individual stock picking to gamblers and speculators. Very few people really understand how to successfully pick individual stocks, and if they do, the news that drives markets today is totally unpredictable, making individual stock picking a highly risky venture. Reams and reams of statistics prove index investing almost always outperforms the financial advisors, money managers, and stockbrokers. Stick with the indicies and you’ll likely wind up far ahead of the game. Care to speculate a bit on some individual stocks? Do it with a small portion of your money, but certainly not the bulk of it.

2. Watch those fees
Wall Street loves investors that don’t watch their fees. For those investing in funds, check out www.personalfund.com. You might be shocked to find out the total cost your funds are charging you to own them year after year. Especially over the long haul, fees can destroy your returns. Minimize fees as much as possible by investing in low-fee, highly diversified investments such as one of my personal favorites, Exchange-traded funds such as those offered by www.ishares.com

7. Don’t take the risk if you don’t need the return
Many people would do perfectly fine getting 7-10% returns on their money, yet their portfolios are invested in things that strive for well beyond that. Especially if you’re a retiree, if you doubled or tripled your money overnight, would you go out and buy a fancy new sports car? A mansion on the hill? Few of us would. And for that reason, always ebb towards the safer side of investing as much as you possibly can

Check out the original article for the rest!

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6 Responses to “The Real 10 Commandments of Investing”


  • Man, you are tough on Rob these days! You probably can’t blame him for the caption though. Usually reporters don’t write the headline…

    Thanks for the link to Alan Haft.

  • CC: I had realized that after I drafted this…that in no part of the body of the article was the word “commandment” written and realized that Carrick wasn’t to blame at all.

    I like DeCloet and a few others but otherwise the Globe’s business section is nothing to write home about.

  • The idea that you should just stick to the index begs the question: which index? The most obvious one would be the MSCI World, but indexes often say an index like the S&P500 is enough to track, but the S&P500 is a sector of the economy (the US sector) and choosing this index is no different to choosing one particular sector of the S&P500, say, a US health index.

  • Norak, you’re right that choosing to only index the US is akin to investing only in one sector, like the US health index. I’ve never said to only index in the US or Canada. Personally my assets are invested in the world in accordance with how what percentage of the world’s total market capitalization each part of the world has. For example, read this article on “Building A Globally Efficient Index ETF Portfolio (updated)

  • People need only one simple rule to follow for their entire investment life.

    take 90-95% of your capital and put it in investments where there is virtually zero chance of losing the principal.
    take the remaining 5-10% of your capital and put it in the riskiest investments you are interested in.

    this way, you are making no claim to the future performance of your investment beyond what you stand to lose: 5-10%.
    ok, use the bond ladder strategy combined with this one simple rule and you will never fail as an investor.

  • This a good list of investing rules of thumb. I would add one other: asset allocation. It explains 90%+ of the long term return of a reasonably diversified portfolio. If an investor is going to spend money on financial advice, getting the right asset allocation should be priority one.
    Regards
    Marc Ryan
    IndependentInvestor.info

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