Tips on sound investing -- before it's too late

Deseret News (Salt Lake City), Nov 7, 2007 by Ben Stein New York Times News Service

A few weeks ago, I was swimming in my pool when I had serious difficulty breathing. "Uh-oh," I said to myself, "now I am about to die." My wife was upstairs reading, way out of earshot, and, anyway, if I was about to have a lethal heart attack, I wouldn't be able to scream.

It turned out to be a nasty but short-lived bronchitis, and as I was lying in bed recovering, I thought, "I will die someday, and before I do, I would like to share with you the best possible thoughts I can, in gratitude for the many insightful letters I have received over the years from my readers."

DON'T SMOKE: It is a filthy, disgusting, life-shortening, cancer- causing habit.

DON'T DRINK TO EXCESS: It robs the mind of motivation, reason and health. I've had (too many) bosses who were heavy drinkers and whose lives were wrecked by it.

GET A BIG DOG: And have that dog sleep in your bed with you. Dogs know nothing of mortality, and they share that peace with you.

INVEST FOR THE LONG HAUL: Do not pay any attention to short-term developments, which are often reported by people whose motivation may be to scare you (screaming about the subprime "crisis") or to make you giddily greedy.

The people who write some of these articles often know very little about markets, are way too young to have learned much, have no money to invest anyway or just like to act like big shots with your money.

In the very long run, stock prices plus dividends (in the postwar period) have rewarded patient, long-term, careful accumulation of broad indexes, mutual funds, exchange-traded funds and variable annuities (with a careful eye on fees). They have not rewarded short- term trading. Such trading based on tips seen on television shows -- even shows whose hosts are true comic geniuses with bald heads ....

AVOID INDIVIDUAL STOCKS: The data on this is as clear as a bell, and has been compiled by high-end thinkers ranging from Nobel laureates to the best friend the ordinary investor has ever had, John C. Bogle of Vanguard. Basically, you and I cannot pick stocks, except for Berkshire Hathaway. I was recently on a panel with the stock guru Ray Lucia, who offered overwhelming data about how impossible it was to pick stocks, trade in and out of them and fare as well as the market. His data was terrifying.

The people on Wall Street do many questionable things. They reward themselves extremely well. But they have, in the last couple of decades, made it possible for almost anyone to get good results in stocks: buying very broad-based mutual funds, index funds, exchange-traded funds and (with an eye on fees) variable annuities and holding them for a long time. The evidence that this form of investment does better over long periods than trying to pick stocks is simply staggering.

Yes, maybe some gurus at a hedge fund can do it for a while. Maybe your cousin claims that he has done it. Don't try to do it yourself.

Wall Street and Morgan Stanley with its fine exchange-traded funds, and Fidelity and Vanguard, with their super-low-cost index funds, have made it possible to be a really good investor. So have many other companies with broad-based mutual funds. You can buy domestic funds, foreign funds, foreign developed markets funds, foreign developing market funds -- all at amazingly low transaction costs.

Just for my own bad self, I suggest the Fidelity Spartan Total Market Index fund (FSTVX), a very broad index fund of domestic stocks; the iShares MSCI Emerging Markets Index fund (EEM), an exchange-traded fund that invests mostly in developing countries' markets, and the iShares MSCI EAFE Index fund, for Europe, Australasia and the Far East (EFA), which invests mostly in highly developed in Europe, Japan and Australia. This has allowed the rank amateur to take advantage of the long fall of the dollar because the stocks are priced in foreign currencies that have appreciated against the dollar.

If you feel like throwing around money speculating on individual stocks, go for it -- but only after you have several millions in index and other mutual funds and exchange-traded funds and variable annuities.

KEEP A BUCKET OF CASH: Have a good chunk of cash, or near-cash, in a place like an ultra-short bond fund. Markets fluctuate. Sometimes they fluctuate horribly on the down side for a long while. This may coincide with the time you're fired from a job or have a child starting college. It is painful to have to sell stocks into one of these down slopes. It is much better to be able to live off your cash reserves. It is even better to be able to buy during those down periods. Lucia calls this approach "bucketizing," as in keeping a bucket of cash for emergencies and opportunities.

KEEP IT SIMPLE, STUPID: There are supersharp traders using computers and leverage who claim to be able to make vast sums based on strategies that will work during up, down or flat markets. They use derivatives and complex arbitrage and exotic instruments like subprime mortgage pools. (Hey, did I just say that?) Don't try this at home.