The investing rules of saving for retirement has many parallels to healthy eating. Mind you, not “dieting,” which too often is just temporarily eating less of the same bad foods.
No, healthy eating is a permanent change, a choice you make with great willpower but make permanently. There are tons of books out there about food, and some of the better ones were written by a gentleman named Michael Pollan, including a simple little chapbook entitled “Food Rules: An Eater’s Manual.”
The brilliance of that book is that it offers a lot of extremely boiled down wisdom. Like a good soup, the more you boil a complex subject to its essences, the richer the experience.
Pollan himself offers this illuminating cheat sheet for an already short book. He says that everything he knows about food could be summed up in a sentence: Eat food, not too much, mostly plants.
Neat, huh? Such a simple concept. Eat food (not fake food, like potato chips), not too much (sheer volume is a bigger problem than the fat or sugar in many people’s daily diets), mostly plants (you need fiber, not another slice of steak).
There are many ways to simplify investing, too. Investing for retirement can be extremely complex. Certainly, there are legions of professionals out there, many of them with good intentions, who depend on that complexity to stay in business. If it were easy, you could do it on your own, right?
But it is easy. Barry Ritholtz, a market researcher and columnist for The Washington Post, recently tackled the complexity issue at length. He had a lot of very good things to say, ideas with which we agree completely. You should invest passively, for instance, rather than pick individual stocks. Keeping costs low is a big deal. Rebalancing is a must, as is asset allocation.
He had a few other key ideas to relate, but let’s focus on these central concepts and see if we can get a “Pollan rule” out of it.
Invest passively: That means buying index funds and exchange-traded funds of the biggest, most liquid markets. The key here is to avoid picking winners and thus also avoid picking losers along the way. A big loser can ruin your whole plan.
Keep costs low: This is huge. That seemingly tiny fee your mutual fund charges is eating your long-term returns alive. You can get costs down easily enough with index products. The gap between 1.27% and 0.05% is bigger than you might think. Both are small numbers. One is much, much smaller.
Rebalancing and asset allocation: But, Mitch, if I don’t pick stocks, aren’t I stuck with market performance? Yes, you are. And that’s what you want. Disciplined rebalancing and a strong asset allocation plan are all the edge you need to compound your way to retirement with minimal risk.
In sum, here’s your “Pollan rule” for retirement investing: “Buy investments, avoid costs, mix it up to lower risk.”
Breaking that down, it goes like this:
1. Buy investments (don’t sit on cash or otherwise try to time things).
2. Avoid costs (keep every penny you can on your side of the ledger, working for you).
3. Mix it up to lower risk (index products, rebalancing and an asset allocation plan are powerful tools).
What could be simpler?