Successful Investing-Not Magic

This is a guest article by Ray, the owner and primary author of Financial Highway, where he discusses investing, saving and practical money management concepts. You can check subscribe to his RSS feed or follow him on Twitter.

The past year and a half has been rough for investors, although many investors have grown tired for the financial advisers and have become DIY investors, others who have lost money are too frightened to do it themselves and have turned to financial advisors.  Although nothing is wrong with having a good financial adviser, you have to understand that there is no magic to investing, the financial advisor doesn’t do anything you would be able to do yourself so why pay those hefty fees? A little while ago I provided some investing tips for successful investing, if you follow most of those tips you should be fine.

How to Become a Successful Investor?

There is no magic to investing, although the investment industry tries to confuse investors and make things look complicated, there is no reason to be worried.  First step to becoming a successful investor is to keep things simple! I am a big fan of simplifying finances and investing, there are too many investment options available and too many contradictory opinions, the best thing you can do is keep your investment portfolio simple, here is how.

How to Simplify Your Investment Portfolio?

1.  First find a good online discount broker, you can follow these tips to find the best discount broker for you. Discount brokers can save you a lot of transactions costs when it comes to investing.

2.  Establish your asset allocation and investment policy statement. Asset allocation will help you determine how to allocated your assets between different asset classes. When you have your written investment policy statement ensure that you stick to it, only this way can you keep your emotions out of your investment and simplify your investing. You can download a sample investment policy statement from our site.

3.  Purchase Index funds or ETFs, often investors purchase expensive mutual funds thinking active manager will perform better. The fact is that active managers lose to index funds, there is no point in paying hefty fees to mutual fund mangers when you can get better performs by investing in index funds and ETFs.

4. Ignore the Noise. Don’t pay attention to the media and so called experts, the media is known to exaggerate the reality and the so-called experts will only confuse you since most of them don’t agree with each other. Keep your focus on your long-term goal and ignore the noise.

5. Rebalance. Although I like passive investing, passive investing does not mean just leave things. Markets will fluctuate and your portfolio asset allocation will change you need to rebalance your portfolio along with market changes, this will ensure you are staying within your determined asset allocation.

Just following those five steps you will be able to dramatically simplify your investment portfolio, as I mentioned at the beginning there is no magic to investing, just keep things simple and follow some investing rules of thumb.

How do you feel about your investment portfolio? Do you find it confusing? Have you simplified your investment portfolio? Any tips you’d like to share?


  1. This article is well-intentioned and I agree strongly with the basic point — that investing need not be complicated to be effective. Ray makes a great point in Item Four, where he says to Ignore the Noise and notes that most of the advice touted by those identified as “experts” is noise. Unfortunately, Ray makes a fatal error in Item Five, in which he himself buys into the noise that has been generated by the “experts” of The Stock-Selling Industry — that Passive Investing can work.

    Passive Investing is staying at the same stock allocation despite big changes in the price of stocks. The idea that this could ever work defies common sense. Price affects the value proposition of everything we buy and there is no reason to believe that this basic rule does not apply with stocks.

    We have 140 years of historical data available to us to check whether what common sense tells us is right or not. The record shows that Passive Investing has become popular on our occasions and that it has brought bone-crushing losses to all who followed it (as well as an economic crisis for the entire nation) every time.

    Ray points out in Item Two the importance of setting one’s stock allocation properly. But in Item Five he suggests that it makes sense to stay with the same stock allocation at times when stocks are priced reasonably as when stocks are priced insanely high. That cannot be right. Investors who seek long-term success (and peace of mind!) must be willing to tune out the noise of the “experts” (the greatest expertise of most is in salesmanship) who tell us to invest passively.

    There may be some benefit to The Stock-Selling Industry if we all agree to put our retirement money into stocks even when they are insanely overpriced. There is no benefit to us as middle-class investors or to our economic system or even to our political system (we are seeing signs of political stress today because of the economic crisis brought on by years of aggressive promotion of the Passive Investing “idea.”

    Yes, invest in indexes and, yes, keep it simple. But if you want to attain peace of mind re your investment strategies, you must hold onto your common sense appreciation of the need to lower your stock allocation when prices rise to insane levels regardless of how often those in The Stock-Selling Industry advise you to do otherwise. The “experts” are not going to finance your retirement when the reality principle asserts itself and your accumulated savings of a lifetime go “Poof!”.


  2. @Rob, I addressed this point in item 5 Re-balancing. Agree that overtime valuations change and so does your original asset allocation hence you need to re-balance your portfolio to obtain your original asset allocation. Equity prices rise= Higher portion of your portfolio in equities now so you reduce it, equity prices decline= lower portion of your portfolio in stocks so you increase it.

  3. I addressed this point in item 5 Re-balancing.

    Thanks for your response, Ray. I know that you are being sincere and I am grateful for your willingness to engage in a bit of back-and-forth.

    The idea of rebalancing is to get back to the same allocation. To invest effectively for the long run, you need to change your stock allocation in response to big price changes. You need to go with a lower stock allocation when stock prices are insanely high (as they were from 1996 through 2008).

    I have a calculator (“The Stock-Return Predictor”) at my web site that runs a regression analysis of the historical stock-return data to reveal the most likely 10-year return on an investment in the S&P index (presuming that stocks perform in the future somewhat as they always have in the past). It shows that, at the prices at which stocks were selling in 1982, the most likely 10-year return was 15 percent real annualized. At the prices at which stocks were selling in 2000, the most likely 10-year return was a negative 1 percent annualized.

    There is no one stock allocation that makes sense both when the most likely long-term return is a positive 15 percent and when the most likely long-term return is a negative 1 percent. 80 percent stocks makes sense when the likely return is 15 percent. But 80 percent stocks is a disaster when the most likely return is a negative 1 percent. 20 percent stocks makes sense when the long-term return is likely to be negative but not when it is likely to be 15 percent positive. The price at which stocks are selling at the time you buy makes a huge difference in the long-term return you obtain from them.

    Say that you had $100,000 to invest in January 2000. Treasury Inflation-Protected Securities (TIPS) were paying 4 percent real, with a government guaranty attached. The most likely return on stocks for the next 10 years was an average loss of 1 percent real per year. The difference is 5 percent points of return each year. That’s $5,000 per year. Multiply that by the 10 years and you have a difference of $50,000. That’s 50 percent of your initial portfolio amount. That’s the difference between investing Passively and investing Rationally. Give up Passive Investing and it becomes possible to retire many years sooner.

    The problem we face as a society is that there are huge financial incentives for The Stock Selling Industry to push Passive Investing. The commissions earned on stock purchases are huge and the commissions earned on TIPS purchases are tiny. If the “experts” (90 percent of the people quoted as “experts” on investing have ties to The Stock Selling Industry) were to tell us what works, they would be fired for the huge financial losses they were causing for the companies that employ them.

    The other side of the story is that The Stock Selling Industry has hundreds of millions of dollars available to spend telling us all precisely the opposite of what works in investing. Most of us are not terribly informed about the historical data (and there are all sorts of tricks that can be employed in the marketing campaigns to make it appear that it says things it does not say). So must of us presume that any marketing slogan that has been repeated thousands of times simply must be true. But it is not true. There has never been a time when failing to take price into consideration when setting your stock allocation worked out well for the long-term investor.

    We need independent sources of information to learn how to invest effectively. We need to pay more attention to people who have studied these matters but who do not have big financial ties to The Stock Selling Industry. There are scores of web site that discuss the realities. But few know about them today because the hundreds of millions spent by The Stock Selling Industry to persuade us to do the opposite of what works has persuaded most of us that what our common sense tells us must be so cannot possibly be so.


  4. i agree with all you have said but i think that you could have added that one needs a firm knowledge base vi-a-vis the financial world. it makes no sense to jump into a river that you have no idea where it is heading. read as much as you can about the preferred investment and then get in and learn more- instead of getting into a rude shock as you get wiped out in your first day

  5. If you have USAA, they have a great fund program that helps you choose the best funds, based on your age, goals, amount of money and investing risk comfortability. Well worth checking out. 🙂

  6. I like the tips in this article. I think many are afraid of investing because it’s seems so over their heads. You hear the financial portion of the news and you are bombarded with terms that are unfamiliar and as a result you stay out of investing. But I think as Ray is pointing out, it doesn’t have to be overly complicated. Investing can be something anyone can do.

    Once we start to talk about changing up allocations based on the valuations of stocks at different points in the market you lose that simplicity and thus lose a lot of potential investors. Could there be better systems for investing than what is outlined here? Sure. But I think this system can still help get a person who isn’t confident about investing a good shot at a decent return over the long run.

  7. Well put! I’m consistently telling my readers to “ignore the noise” and simply invest in ETF index funds and perhaps no load mutual funds. Invest and forget! Although I agree with comment #4 that you still should have some idea of how financial markets work and what you’re doing…you don’t want to invest for the “long term” and then panic the first time the market dips and sell everything off.

  8. I am all for DIY investing to an extent, but I think if someone is part of the large segment of people who do not know the first thing about investing, paying for an hour or two with a financial advisor could be money well spent. One thing I have noticed is that without proper education, many people don’t realize the true risk in certain investments (e.g. REIT’s), so they get develop a portfolio that is inappropriate for their risk tolerance. Everything is good in the bull market, but then suddenly that risk materializes and people panic and sell, losing big. They probably shouldn’t have taken that level of risk, and perhaps a good financial advisor could have spent 2 hours to explain these things and design a diversified portfolio that was more appropriate for them. I wouldn’t hand over your investments to be “managed” by someone else though, I just think a lot of people need to have a better education before risking their life savings. Just my 2 cents observation.

  9. All the items in this list are important…. I’d probably add invest at regular intervals. And would also say, asset allocation is one of the most important things in determining investment performance, risk tolerance and the emotional fortitude to stay the course even when things turn bad. More money is made in bear markets than at any other time, but many people can’t take the temporary declines in value and pull their money out of the market.

  10. Getting people who haven’t been individual investors in the past to start managing their own portfolio is extremely risky.

    All my friends are jealous of my performance, especially when their portfolios were crashing. They wanted to become individual investors, but I told them don’t jump all in.

    I told them they should allocate a small portfolio, maybe 10k, and try it out. Just because they have a few wins, don’t get too excited (or greedy). After a year of success, you can consider investing more.

    What do you think?

    Trader Bots

  11. Hi,
    Bob’s response is very typical of passive investing strategy. He insists that passive investing has people staying the course no matter what. and then cherry picks the disasters to make his point without considering the investor’s age. Heck, a young person should take advantage of disasters and buy all of those ETFs when they are cheap. An older retired person should never have 80% stocks and 20% bonds. I was ok last year because I had 30% stocks and 70% bonds not because I was so smart, but because I was retiring and that is what an allocation to stocks and bonds should be in or near retirement. Rebalancing is changing to the current situation. Rebalancing is selling what’s hot into buying whats cold. It is very difficult to do psychologically. I slowly rebalanced into a 30/70 over several years and it paid off handsomely.
    What is the alternative to passive investing? For the average investor like me, I will NEVER use managed active fund managers again. NEVER. They are too expensive, they are wrong most of the time and they think they can beat the averages. Anybody who tells you that they can beat the averages is nothing but a sales pitch. RUN! I like the averages. In fact, if I just had the averages all of these years, I would be much better off than I am now, but I am not complaining.
    11% per year in the 500 index since 1976, Wow!
    Great article