Our Core Investment Beliefs

Every January, I like to restate our team’s core investment beliefs to provide context for everything I say and do throughout the rest of the year. Below are the most important bullet points.

• Simplicity is the ultimate sophistication.

Scott Adams, creator of the Dilbert comic strip, once wrote, “The best systems are simple, and for good reason. Complicated systems have more opportunities for failure. Human nature is such that we’re good at following simple systems and not so good at following complicated systems”.

We agree. By simplifying the portfolios, we reduce the risk of failure and make the plan easier to follow when things get challenging.

• Stocks will outperform bonds over the course of an investor’s retirement so long as he or she can stay invested through the ups and downs.

Statistically, stocks have outperformed long-term bonds roughly 9 out of every 10 rolling 20-year periods since 1926. Cash and short-term bonds have never outperformed over that same time. From today’s starting interest rates, the odds of long-term bonds outperforming the stock market over the course of a 20-plus-year retirement may not be zero, but they are close to it. (Source for return figures: Ben Carlson)

• No matter what the headlines say, the bad news is very rarely the whole story.

Morgan Housel has written, “An important fact that explains a lot of things is that good news takes time, but bad news tends to occur instantly.”

While the news will always focus on the bad things, progress is continuing its slow, steady march in the background.

• A retiree should have no less than two years of expenses in safer investments (cash reserves and short fixed income).

Owning stocks doesn’t work if you are forced to sell when they are down. Cash and short bonds may seem like a drag on the portfolio when times are good, but the times aren’t always good.

• Never try to make a long-term investment strategy out of short- to intermediate-term disruptions.

Events will come along that feel like they change everything. In these moments, it will be tempting to abandon your plan. It is important that you do not.

• After-tax returns are the only kind that matter.

The investment strategy that works best for a Roth IRA may not make any sense in a taxable account. Replicating someone’s strategy without replicating their tax situation will likely generate very different results.

• Staying fully invested during temporary market declines is the only sure way to capture the entirety of the market’s long-term trend.

Every market decline feels like the beginning of something worse, and the temptation is always to sell and wait for the situation to pass. This is the biggest and often most expensive mistake an investor can make.

• For investors seeking lifetime income, dividends are important, but always secondary to total return.

Investors often equate income with safety and spending money. However, a stock that pays a 7% dividend but declines in value by 8% is worse for a retiree than a stock that appreciates by 1% and pays no dividend.

• A long-term investment in equities is premised on a belief that humanity will continue to progress, global wealth will continue to grow, and the great businesses of the world will continue to innovate.

It is impossible to be a long-term investor without some amount of optimism for the future. Today’s technology will look archaic by tomorrow’s standards, and the biggest companies of 2026 will eventually be replaced by upstarts that have found ways to make things better and more affordable for a greater number of people.

If you think the future is doomed, the stock market isn’t the place for you.

• Outperforming a benchmark is far less important than being on track to achieve your financial goals.

As I wrote in my note, 16 Things I Learned in the Last 16 Years, a person’s investments should be tailored to whatever goal she is trying to accomplish. A retiree’s goal is often to minimize the risk of running out of money, yet she will evaluate the performance of her investments based on whether they outperformed the S&P 500.

• Always understand the risks you are taking.

A portfolio that can decline by 40% eventually will. Efforts to limit losses through market timing will only compound the problems. If you can’t stomach a loss that large, build a different portfolio.

• An investment fund should be no more liquid than its underlying investments.

A liquid product invested in a bunch of illiquid assets will eventually blow up when everyone tries to sell at the same time.

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Personal Note:

We took a family trip to Park City for the New Year. It snowed, and no one was injured. Overall, a great success.