Market Investing | Our Goals

Fundamentals of Market Investing by Adam J. McKee

This work is licensed under an Open Educational Resource-Quality Master Source (OER-QMS) License.

Open Education Resource--Quality Master Source License

My goal in writing this book is one that I hope you will adopt.  I want you to have the knowledge and skills necessary to retire wealthy.  That is a tricky term.  The sum of money it takes to consider oneself wealthy is a highly subjective idea and will vary widely from person to person and change within each of our minds over time.  At the lowest level, it means that you can quit working and your lifestyle doesn’t change.

That means that your social security and other income streams amount to the same thing as your take-home pay from working.  Almost anyone at any age can establish a plan to accomplish this modest goal.  If you are young enough and driven enough, you can set a more ambitious goal of having enough money to do whatever you want whenever you want for as long as you live without having to worry about ever running out of money.

This later goal may seem unattainable but will find that in your golden years, your value system will change and the things that you value most aren’t unreachable.  Many people want to travel the world and see exotic places that they’ve dreamed of for years.  Some want to provide a nest egg for the next generation or send their grandchildren to a good college without the burden of student loan debt.  These sorts of things are what I am talking about, and they are undoubtedly achievable goals.  The secret to all of this financial security is that there is no secret at all.

The knowledge of how to do it is out there for the taking, and it doesn’t take a mathematician or a genius stock picker to do it.  Perhaps the least appreciated fact about investing is that the most successful investors are incredibly dull when it comes to investment strategies.  There are no secret strategies, mystical systems, or little-known tactics that can make you rich quick.  Getting rich is actually easy, but it’s slow and tedious.

My ultimate goal in this book is to convince you to save diligently.  We’ll explore some methods that make this as painless as possible, and that can help keep you from hurting yourself.  The odds are that if you are reading this book in the first place, you already know that you need to save.  My focus, then, will be convincing you of the best way to save so that you can reach your financial goals without taking on too much risk or making some common mistakes that are easily avoided once you are “in the know.”

If you are looking for a get rich quick scheme or a system to build extraordinary wealth such that you can buy a football team, then you’ve come to the wrong book.  I am going to try and convince you of some things that go against conventional wisdom, and you are certain not to like some of them.  Some of these are as follows:

  1. You cannot beat the market, and you will lose money and time if you try.
  2. Nobody can beat the market for you, and you will lose money and time if you let them try.
  3. Mutual funds and ETFs, not individual stocks, are the key to generating wealth.
  4. Most financial advice is wrong.
  5. Hot stocks, hot funds, and hot managers will burn you.
  6. Asset allocation, not hot stock picking, is the most significant predictor of investment success.
  7. Past performance is not an indicator of future performance, just like the SEC warned you.
  8. You cannot be successful without taking risks, but that risk can be defined and minimized.
  9. Financial professionals define risk differently than real people, and you are a real person.
  10. Diversification is your best defense against risk.
  11. Portfolios behave differently than the assets that they are composed of.
  12. No one can predict where markets will go in the future, especially the talking heads on TV.
  13. Boring investing is profitable investing.
  14. You are not a unicorn.

That is a pretty short list of themes on which to base the most important decisions of your life.  It, of course, does not provide all of the nuances and context that you will need to formulate an investment plan and put it into action, but it is an excellent foundation.  If you do not believe these simple facts as I have stated them, then I beg your patience as I develop my arguments and fill in the gaps during the remainder of this book.  At each point, I want you to evaluate what I say and reject anything that does not ring true.

Economics and finance are, at their core, social sciences.  If you know anything about the social sciences, you know that predicting human systems with perfect accuracy is a pipe dream.  The systems are just too complicated to predict with absolute precision.  There are millions of pages of information out there on how to invest, and much of it is wrong.  Take everything you read and hear with a healthy dose of skepticism.  Do your own research, and draw your own conclusions.  Ultimately, it is your money and your responsibility to make it grow and keep it safe.

As I will repeat several times throughout this book, the sooner a person learns to manage money and invest, the better off that person will be financially and psychologically.  It boggles the mind that, in an era of self-directed retirement savings, the public is not taught any money management or investment strategies.  It seems that our educational system is stuck in Victorian England when it was somehow vulgar to speak of money in polite company.

Our public schools do not teach it, our trade schools do not explain it, and our colleges and universities reserve these critically important courses for business and economics majors.  Employers may require new employees to sign a form saying they understand their benefits, but few of us seldom do understand.  The average person is all alone in the process of gaining a financial education, and most either do not bother or follow a path of electronic misinformation to ruin.  Those that struggle through and actually do become successful investors usually have some heavy early losses to show for their trouble.  When we start out saving late in life, the results of these losses can be catastrophic.

Unless you are very young, you just cannot afford to attempt investing without first learning what portfolio risk is and how to manage it.  When late starters do make such mistakes, they tend to gravitate toward the extremes of conservatism and taking on too much risk.  Both, as we shall see, are terrible investment decisions.  Younger readers, on the other hand, can afford to take on some risks during the learning process.  When you have not saved much, the stakes are small, and an entire career is plenty of time to make up for the damages.

The final chapter of this book is all about asset allocation, which is the real secret to successful investing.  The problem with asset allocation is not that it is complicated, but that it is deeply personal for each of us.  We all have different goals, objectives, responsibilities, dreams, and thoughts that keep us up at night.  Ultimately, you have to construct a portfolio that matches you on each of these facets of your psychology and your life.

To do that, I need you to confront some myths of investing head on and get the wrong ideas out of your head.  I’ll also need you to grasp the basic types of investment instruments and the unique risk and rewards of each.  These risk and reward factors are related to prevailing economic conditions, so we must delve into the world of macroeconomics.  We must also consider how to protect your profits from one of the most dreadful risks of all:  The Taxman.

Last Modified:  07/11/2018

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