A simple way to invest is to split my money 50-50 between stocks and bonds – that is what I do with my 401k (retirement plan). For my other savings, I loosely stick to this 50-50 split, but I do pick specific stocks and I do that following certain rules.
Overall, there are two goals to how I am investing. My main goal is to avoid losing money. This is the majority of my strategy. My secondary goal is to invest in things that, in the long term, I think will do well. I use certain rules to identify what I think will be safe and will do well.
In short here is why I think it is very important not to lose money:
When things are going well with the economy, it is nice if my investments are doing well. However, I am more likely to have a job and so are my family. So getting a good return on my investments is nice but not essential.
When things are going badly with the economy, it is pretty annoying to lose money. On top of losing money, I have a bigger chance of losing my job and I need the money more than when the economy is going well.
In short, it is often better for me to avoid losing money when things are going badly then to make a lot of money when things are going well. Furthermore, if the economy is doing badly then many things gets cheaper to buy (e.g. houses, stocks), so if I haven’t lost too much money, I am in a good position to buy things.
The Ben Graham 50-50.
Ben Graham wrote a book called The Intelligent Investor. One of the investing strategies discussed is to invest 50% of money in stocks and 50% in bonds. Here is why I think this is a reasonable thing for me to do:
- Why not put more in stocks? Many people recommend putting much more in stocks. For example, Warren Buffett has suggested putting 90% in stocks (the S&P500 and 10% in bonds (although he doesn’t do that with his company’s money). I think that is a bad idea. With 90% of my money in stocks, the stock market could very well fall right before I need the money (say, for a mortgage down-payment or for a wedding or for retirement). Is it really worth rolling that dice to get some upside?
- Why not put more in bonds – wouldn’t that be safer? Keeping money all in bonds (or cash) also has risks, such as inflation or an increase in interest rates. If I had all of my money in bonds (especially of mixed or long durations) right now when the interest rates are near zero, the value of those bonds would plummet if interest rates rise to even 3 or 4%, never mind 10 or 15%. I’m not saying that will happen, it’s just a risk I don’t want to take.