How To Be An Index Investor
I hear it all the time. “How hard can it be to buy a few index funds that track the markets? Anyone can do it. It’s a no brainer.” If only this was true.
Investing in index products alone won’t make you a successful index investor. The problem isn’t the products – it’s your brain. In fact, the opening quote in the article is true. You would be a successful index fund investor if you had no brain to tempt you to do otherwise. For the rest of us, it can take every ounce of brain energy we have to resist that temptation.
Your success as an index fund investor depends on a deep understanding of why you’re investing this way, how to manage your portfolio of index products, and staying the course no matter what. It takes the right philosophy, the right strategy and diehard discipline to be a successful index fund investor. It’s no less than an investment lifestyle.
For the past two years, I have been unsuccessfully attempting to write a book on this topic – and I’m nowhere near finished. That’s insane considering the book is only intended to be 100 pages. It’s the shortest book I’ve attempted to write. In contrast, The ETF Book only took me six months to write and it was 375 pages long! See all my books on RickFerri.com.
What’s my problem? It’s not laziness or a lack of content. I’ve got a passion to tell the world about this way of investing, and more than fifteen years of content here, there and everywhere. The problem is that I want the book to be perfect. I want it to be clear, concise, smart, logical, usable, and create a WOW! factor or Aha! moment for readers. The undertaking is torturing me.
What I have learned by this experience is that there is no such thing as a perfect investment book just as there are no perfect portfolios or perfect investors. Nothing is perfect. Trying to create the perfect anything is impossible because we only know what’s perfect or near perfect in retrospect. Something has to be created first before we can judge how perfect it is.
An attitude change was definitely in order if my book was ever going to be written. I needed to not worry about being perfect. I just needed to get it done, get it out there and let others judge.
For my own sanity, and maybe for the benefit of humanity, I have decided to do something I’ve never tried before. I’m writing and publishing this un-perfect book on this blog. It will be completed, section by section, using articles of 1,000 words or less over the course of time.
This first article is an overview of my un-perfect “How to Be an Index Investor” project. I’ll begin posting sections of the book in the near future. Each section will include a Table of Contents so that you can see where it fits in relation to the rest of the book, and refer back to previous sections if you wish. I can’t say that I’ll write every segment in order of the finished book, but I’ll try my best.
“How to Be an Index Investor” will eventually be made available on Amazon.com as an eBook and print-on-demand. I’ll also retain these articles in the public domain so that cheap people like me can read the book for free.
Figure 1 illustrates the three basic principles of successful index investors that make up the core of soon-to-be written book. These principles are philosophy, strategy and discipline.
Figure 1: Three Principles of Successful Index Investors
The best index investors have a sound investment philosophy, a workable strategy and a strong discipline to follow their plan. These steps sound easy, but they’re actually not. The following touches on these three principles.
1. Commitment to the philosophy.
Have you had an Aha! moment in investing? It’s a realization, inspiration, insight, or recognition that financial markets are relatively efficient, and that market returns are superior to the returns earned by most investors. You then realize that your best opportunity for success in the long-term is to invest in a portfolio of low-cost index funds that earn market returns.
2. Create a portfolio strategy.
There are many different types of index funds and exchange-traded funds (ETFs) that track different financial markets. Sorting out these funds and the markets they track is a challenge. Creating a portfolio out of this information can be even more confusing. It doesn’t have to be. Start with a simple asset allocation between stocks and bonds, and then represent those asset classes with a few broad market index funds or ETFs. Starter portfolios will be included in the book.
3. Stay the course with discipline.
According to Greek mythology, the Isle of the Sirens was inhabited by three nymphs. These Sirens would lure sailors out of their boats with beautiful song. Their tunes cause men to thrust themselves overboard into the sea and ultimately to their death. Ulysses was sailing nearing an island, and in order to avoid this fate, he ordered his men to tie him to the ship's mast and then stuff wax in their ears so they could not hear. Successful index investors do the same thing, avoiding the lure of theSirens of Wall Street who sing songs of great fortunes. Ignore this noise. Stay the course with discipline and help from continuing education.
Here is an outline of my proposed online book:
How To Be An Index Investor
Chapter 1: The Principles of Success
Principle l: Philosophy
Chapter 2: The “Aha” moment
Chapter 3: Investment Choices
Principle II: Strategy
Chapter 4: Your Asset allocation
Chapter 5: Implementing a Plan
Principle III: Discipline
Chapter 6: Staying the Course
Chapter 7: Continuing Education
Chapter 8: Mastering Success!
Philosophy, strategy and discipline are the keys to successful index investing. The rewards go to those who diligently follow these steps. Stand by for more!