An Investing Strategy That Works

Jeremy BiberdorfBy: Jeremy Biberdorf

January 28, 2015January 28, 2015

An Investing Strategy That Works

Guest contributor, Barbara Friedberg

Are you interested in an easy way to take part of your income, invest it, and have tens of thousands of (dollars or more in the future?

Do you think you need to be super smart, sophisticated and educated to be a successful investor?

What if I told you that I know plenty of people who are in the second half of their lives now, never had particularly high paying jobs, lived quite well, with homes of their own, nice cars, annual vacations-who have high 6 figure (and more) investment portfolios.

Would you believe me?

One of the advantages of advancing age, is experiencing the results of your former behaviors. When my face was broken out with acne as a teen, my mom said, “You’ll appreciate your oily skin later in life, because you’ll have fewer wrinkles.” And she was right!

I wanted to invest in my 20s and so I started buying stocks such as Motley Fool stock recommendations. My job at San Diego State University in my 20s offered a 403(b) (U.S. non-profit employee retirement plan), so I jumped in. I wasn’t thinking much about compounding returns or how much money I needed in retirement. My interest was to build up some financial security for the future. My future goals were vague at best.

Flash forward many decades and I’m pleasantly surprised at how a habit of saving in retirement plans, and investing extra money, has actually turned into an investment portfolio which I can live on.

Are You Interested in Learning How to Invest-Without Sacrificing Everything Now?

Before you dive into investing, there are a few steps to take first. You need to get rid of most of your credit card debt. If you have kids or someone depending on your income, then you need some term life insurance. Finally, build up an emergency fund in cash of 6 to 9 months, after all – sh*t happens.

investing strategyNext, it’s helpful to work on your career and building a decent income. For most, this takes some time. But it’s important to have a solid income trajectory to minimize financial stress.

Learning to invest-like anything of value worth knowing- cannot be learned in an hour or two. But, with a good book or two and some time to implement the investing recommendations, you can  set yourself up with a sensible investing strategy that won’t take too much time to implement and will likely net you long term financial security.

It can be quite overwhelming to look at all the investing gurus and resources out there. As Barry Schwartz discussed in The Paradox of Choice, sometimes more choices are actually worse than fewer options.

It is with that inspiration that I wrote Invest and Beat the Pros-Create and Manage a Successful Investment Portfolio. (on sale for $.99 from now until February 8th and free from February 9 through the 14th).

Here’s an excerpt from chapter 1:

What Is the Investing Strategy That Beats the Pros?

“So investors shouldn’t delude themselves aboutbeating the market. They’re just not going to do it.It’s just not going to happen.”

Daniel Kahneman, Nobel Laureate in Economics, 2002

As a 30 year investing veteran, portfolio manager and university investments instructor who reached her retirement goals a while ago, I want to share what I’ve learned about investing with you. You’ll also discover what Nobel Prize winners, academicians, and many financial experts have proven works in growing your money by investing.

Asset Classes Index Fund Investing Beats Professional Portfolio Mangers 70 Percent of the Time

The first day in my Investments class in the Penn State MBA program, the professor said, “Raise your hand if you think you can outperform the markets.” My hand shot up. After all, I was a portfolio manager with a solid investing record. I was fully confident that I could outperform the markets.

Throughout the class, I delved into the research and totally revamped my investing approach based upon the data. That’s right, there is evidence which defines the most successful investing approaches. Turns out, diversification based upon asset classes in line with your risk tolerance leads to returns which outperform professional investors 60 to 70 percent of the time.

Don’t just take my opinion; in addition to Nobel Prize winner Daniel Kahneman, there are scores of well-known economists and investors who support this investing approach.

A few of the proponents of index fund investing based upon asset classes include John Bogle, the founder of Vanguard Funds, Warren Buffett, Rick Ferri, author and Forbes columnist, Nouriel Rubini, the economist who predicted the 2008 housing collapse and subsequent recession, Dr. William Bernstein, widely acclaimed investment researcher and author, David Swenson, Chief Investment Officer of Yale University’s Endowment Fund, and countless others.

The research on asset classes is clear, 60 to 70 percent of active mutual fund managers fail to beat the indexes each year.

Why Not Invest With the 30-40 Percent of Active Managers Who Beat the Index Funds Each Year?

What about the 30 to 40 percent of professional managers who beat the indexes? Why not invest with those outperforming managers or pick stocks and beat them yourself?

Here’s the problem. Even if a professional outshines the index one year, and let’s say the manager is really skilled and outperforms the next year as well, over the long term it is almost impossible for anyone to consistently beat the indexes.

Mark Hulbert, in the May 10, 2013 Wall Street Journal article “Man vs. Machine: The Great Stock Showdown”, asks us to “Consider the 51 advisers out of more than 200 on the Hulbert Financial Digest’s list who beat the market in the decade-long period that ended April 30, 2012 (as measured by the Wilshire 5000 Total Market index, including reinvested dividends).

“Of that group, just 11—or 22 percent—have outperformed the overall market since then. That’s no better than the percentage that applies to all advisers, regardless of past performance. Over the past year, on average, the group has lagged the Wilshire index by 6.2 percentage points.

In other words, going with a recent market beater doesn’t increase your odds of future success.”

What about George Soros or Warren Buffett? Okay, maybe there are one or two investors in the world who outperform the indexes over the long term. Ask yourself this, “Are they really that skilled or just unbelievably lucky?” And what are your odds at beating the indexes?

If you would like advice from Warren Buffett, Berkshire Hathaway, Inc., read what he said in a 1996 shareholder letter, “The best way to own common stocks is through index funds…”

What is the Investing Strategy That Works?

Realistically, there are only a few steps to choosing an investing strategy.

  1. Figure out your risk tolerance. In other words, how much up and down in your portfolio value can you stomach?
  2. Set up an automatic debit from your paycheck or other income source into an investment and/or retirement account.
  3. Based upon how much risk you can stomach, you’ll choose the percent of your investment money that will go towards stock mutual funds and the percent invested in bond funds. (The more conservative you are, the lower the percent of stock investments you’ll choose).
  4. Pick several low cost mutual funds for your investment portfolio and as your money comes in to the investment account, allocate it into the previously chosen percentages to purchase shares in the mutual funds.

That’s about all. Once a year you can review and rebalance back to your original percentages.

Sounds fairly clear cut doesn’t it?

For a bit more detail on setting up your investment portfolio, check out Invest and Beat the Pros-Create and Manage a Successful Investment Portfolio.

Barbara Friedberg, MBA, MS is a veteran portfolio manager, expert investor, and former university finance instructor. She is editor of Personal Finance; An Encyclopedia of Modern Money Management, How to Get Rich Without Winning the Lottery, Invest and Beat the Pros-Create and Manage a Successful Investment Portfolio and publisher of Barbara Friedberg Personal Find her “Young & Oldish Money” podcast on iTunes.

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Jeremy Biberdorf
Jeremy Biberdorf

About the Author:

Jeremy Biberdorf is the founder of Modest Money. He's a father of 2 beautiful girls, a dog owner, a long-time online entrepreneur and an investing enthusiast.

8 thoughts on “An Investing Strategy That Works”

  1. Nice seeing Barbara here, too. I already ‘stalk’ you on your own blog. Love the article and this wealth of information you shared with us. Worth bookmarking and studying patiently.

  2. This a sweet article Barbara how much of an initial invest is needed to invest with the managers who beat the indexes? You also mentioned picking stocks for ourselves and beating them that way. How would one know which stocks to pick to meet that objective?

  3. Thomas @ i need money ASAP!

    I’m a big fan of index investing. I believe in the semi-strong efficient market theory. Only the top (~5%) professionals can beat the market and they help ensure prices remain fair/balanced. So I prefer to buy index funds and follow a value averaging investment approach where asset classes get rebalanced every 4 months. Right now we’re 60/40 stocks bonds due to the record level of the markets. A few years ago it was 80/20. That’s the cool thing about the value averaging strategy, you mix changes up/down over time depending on how markets perform vs expectations.

  4. Mr Ikonz @ Project Ikonz

    My whole net worth strategy is based on a similar investment philosophy – buying “beta” at the cheapest price. I simply set an asset allocation guideline, then implement using ETFs.

  5. @James, Actually, to beat the pros, all you need to do is set up an investment portfolio in diversified index funds and contribute through thick and thin. Actually, Iinvest and Beat the Pros will be on a FREE promotion from Feb 8-13th, so why not pick up a copy from Amazon kindle?

  6. @Thomas, Although that’s a bit more rebalancing than I suggest, I certainly agree with attending to overall market valuations and tilting your asset allocation depending upon that data. Although that approach is a bit more than the average investor may be up for, or needs to do.

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