In last month’s letter, I wrote to you about what were universally bad investment practices – simply bad bets if you looked at all the data.  Given that I am a data guy, in this current world of increasing anxiety, it would likely be comforting for you to know the inverse of the above – what would be the tried-and-true best investment practices? The reasons people get confused are that they listen to one nouveau investment guru or the other (and never forget; if gurus were right, they would be enjoying their wealth, not talking to you) or they subconsciously let emotions or rampart psychological mistakes control them.  You might find it interesting to know that for the last 40-50 years the average investor gets 50% – 60%^[i] less than they deserve due simply to emotions.  It’s hard, but investing done well is void of emotions.  Thus, to complement last month’s top 10 worst investments, this letter will address the top 7 best investment practices.  It is my observation that not 1 person in 50 either knows the below list or does it.

In no order of importance, because all the below must be done cohesively to maximize your outcomes, the best practices are:

1. Invest your monies passively, using index funds or other similar vehicles. If you look at all the data on actively-managed funds – where someone is saying they know when to buy Apple and sell Alphabet (Google) – you will observe that they consistently underperform their benchmark (data says 70% -90% of the time).  They underperform so regularly, in fact, that you could paste your living room wall full of random company names and throw darts to pick your stock…and you would do just as well. An ‘index fund’ is that broad passive selection of companies put together for you, though with a bit more structure and maintenance.  If you thus would use a well-constructed portfolio of index funds, over a 20-year period you’d beat those well-paid ‘experts’ 95%-99%^[ii] of the time.  (To be clear, as a client with Wellspring, you are passively invested and beat even the well-performing respective index 88%^[iii] of the time, which is phenomenal)
2. Get your Asset Allocation right.  Stocks out-perform bonds on any long-term basis and yet high-quality bonds are ballast to your ship, a keel to your sailboat in heavy winds.  Your institutional asset class selection (making up your Asset Allocation) has been measured to account for ~92%^[iv] of the variability of returns, so if you get your asset allocation right and you are in passive funds, you are already the majority of the way home to good results.
3. Rebalance periodically to maintain your Asset Allocation.  Rebalancing has a lot of fancy financial words behind it but in practical terms, it implements a regimental discipline of buying low and selling high- just like your grandma told you to do.  This positive result literally can’t be any other outcome: it is a tautology.  Further, if done well you will never leave the equity markets due to fear or uncertainty (see the damage of that approach in the article attached).  Instead – and wisely – you will learn to embrace volatility as your friend (remember the earlier monthly letter to you with the formula; Risk = Return).  Thus, following the discipline of rebalancing, you will naturally implement what Charlie Munger, the esteemed compatriot of Warren Buffet, calls the First Rule Of Compounding: “Never interrupt it unnecessarily”.
4. Get diversified.  Be invested in Large-Capitalization, Mid-Cap, Small-Cap stocks, invest in Developed Markets and Emerging Markets, etc. because the truth is you never know where the next winner will come from that will significantly boost your returns.  Complement your stocks with high-quality fixed income (bonds) but let your risk be in your stocks, not in the ballast of your ship (see #2 above).  If you think you are the only investor who knows your newly acquired Artificial Intelligence company is going up in value, you are either going to jail for inside trading (hello Martha) or you have an inflated sense of self.  As David Booth, one of the founders of passive investing has astutely observed: “When it comes to investing, a lot of things are interesting without being meaningful”.
5. Be mindful of taxes. Never forget that it’s not what you make that counts, it’s what you keep.  Make sure that you or your advisor are smart on taxes to guide you because that IRS world is a world of itself.
6. Start early…but start.  Someone who invests $200 per month from age 25 to age 35 – and never saved another nickel – could have almost $300,000 at age 65 with a 7% average annual return. If that same person waited until age 35 to invest $200 per month but then kept investing all the way until she was 65, they would end up with only $245,000 by age 65.
7. Finally, have a plan; a comprehensive, written, goal-oriented, dollar-quantified, timeframe-specific financial plan to guide you in your actions every year to make sure you are acting wisely on your money today to make desires for the next 30-60 years come true.  You can’t control the ups and downs of the market, but you can relax knowing you have done everything you can do.  The future might be uncertain, but the quality of your decisions does not have to be.  Through regular updates to your written plan, you have maximized your likelihood of being okay.

For kicks, I Googled ‘best investment practices’ and got 459,000,000 results – which is utterly useless and somewhat scary on this Halloween day.  If people would instead follow the above 7 practices they would succeed. The best news I can provide to you to lower your worldly anxiety is that with Wellspring you are doing every single one of the above best practices (plus a fair number of others), and you are doing it all the time.  You simply cannot do more.

It remains my deep and distinct honor to serve you well.

Patrick Zumbusch
Founder and CEO

[i] Dalbar inc. (Guide to the Markets –U.S. Data are as of September 30, 2021)

[ii] Three Sources; Larry L. Martin, The Journal of Investing, spring 1993, Allan Roth, How a Second Grader Beats Wall Street, Richard  A. Ferri, The Power of Passive Investing

[iii] Dimensional vs. the Industry (20-year period, respective equity funds that outperformed the benchmarks, Dimensional Fund Advisors, November 30, 2022)

[iv] “The Cross-Section of Expected Stock Returns” (Eugene Fama, Ken French, The Journal of Finance, June 1992)