2 Dead-Simple Rules of Thumb For the Average Investor

Let’s start with the facts: you’re not Warren Buffet. 

(And if by chance you’re reading this Mr. Buffet— I’m a big fan!)

You and I are just average investors. 

Your goal should not be to “beat” the market, but hitch your investments to the market and go along for a nice ride.

The name of the game, therefore, is to not make mistakes.

Unforced errors seem like they’d be easy to avoid, but when it comes to money, especially large chunks of it, people do all sorts of weird and unexpected things.

That doesn’t have to be you. In fact, my goal in writing this post is to guide you onto the smartest path you can be on.

If you read my post yesterday about investing an unexpected lump sum of money I had come into, you’ll note that this isn’t easy for me either.

Even I have to slow down and talk myself into a reasonable course of action.

After a little more deliberation, I arrived on the following allocation:

• Domestic stock index – 55%
• International stock index – 20%
• Broad bond index – 25%

But most important, in my opinion, is how I arrived there, and the supporting “rules” I used.

Here are the two big ones that guided me:

#1 – Choose wisely where you get your advice.

They say the most important decision a fisherman makes is where to fish.

A good fisherman in an empty pond, won’t be very happy. But even a mediocre fisherman in a freshly stocked pond will do alright for themselves.

If you’re not a professional investor, then you’re going to end up relying on others for investing advice.

You don’t have to be a good investor yourself, you only have to be a good judge of who is offering you sound advice, and what their incentives are.

On one hand, you have the John Bogles of the world (founder of The Vanguard Group). John spent his lifetime preaching lessons on simplicity, diversification, and consistency in investing.

Or you can get your advice from r/wallstbets, the popular online investing community that celebrates those who make YOLO bets (as in “you only live once” so might as well go all-in on one stock). 

Those are just two examples, there are many variations of each, and plenty in-between.

The important point is to spend your time vetting a trusted advisor. It might be someone whose advice you read online, or it may be a local financial manager.

If you find a wise person to follow, you’re 90% of your way to a solid financial plan.

In my case, for my investment decision, I outsourced my thinking by mimicking John Bogle’s famous “Three Fund Portfolio”.

Maybe there’s a more perfect plan out there somewhere, but I’m not sure I’m sophisticated enough to find it on my own— not without a lot more effort.

All I know is that I’m fishing in some pretty good waters by following Jack’s advice, and I like to keep things simple.

#2 – Don’t rely on discipline to make good decisions.

Once you’ve accomplished step number one, I said you’re 90% of the way there.

I may have undersold the second step a bit, as this is exactly where I usually end up getting tripped up.

I’m really good at finding good advice, but then I don’t have the good sense to stop looking.

I keep reading, and eventually I find another idea I like even better.

After switching around a bunch, I no longer feel committed to any particular idea, and then when something happens or my mood changes one day, I’m more likely to give in to my “animal spirits” and do something dumb.

What kind of dumb you say? Well, about five years ago, I invested a chunk of money in Netflix because I thought I didn’t see how any other streaming service was going to compete with them.

Their stock plummeted, I panicked and sold, and then proceeded to watch their stock climb back up to new highs over the coming year (while I was no longer invested).

Thankfully that was a relatively modest sum of money, but it taught me something important about myself: I’m just as prone to these impulsive decisions as anyone else.

This second rule of thumb is about reducing the number of decisions you make, and in turn, your chances of screwing things up.

After making my initial $100,000 investment across those 3 funds, I immediately set up a recurring investment for all three.

That way, when new money starts coming in, I don’t have to think about it or re-open the question of how to invest.

In fact, the best thing that can happen at this point is that I forget the money is even there, and check it maybe once a year.

Follow these 2 dead-simple rules, and I’m confident you’ll never go too far wrong with your own personal investing.

It may not make you as rich as a lucky “YOLO” bet, but you’ll have the luxury of sleeping well as you slowly climb the ladder of financial freedom.