Grandpa’s Rules ─ My Investment Plan... or An Heretical Proposal Supported by Logic, History and Experience (but no credentials).
Note to Reader: This material was originally written in 2018, pre-Covid. Read updates Spring 2021, Winter 2024, Summer 2024 for very significant changes.
(Hint: QQQ’s are a very important component.)
Please remember, these rules are for my grandchildren. Any other party implementing them should only do so with PROFESSIONAL ADVICE.
The following guidelines — my grandchildren call them “Grandpa’s Rules ” — are going to contradict most of what you’ve been told during your investing life. But, when thinking in terms of lifetime investing, I’m convinced they’re the way to go. This book will show you why and how you can profit from these ideas.
This is just the menu. The courses are served in the chapters that follow. Your investing success is the dessert. And you can jettison the Pepto-Bismol.
1. HAVE A PLAN
Do have a PLAN. That’s basic. It’s NOT new, and it’s NOT heretical. “Have a plan” is an old market aphorism – it’s an eternal investing truth that has, unfortunately, few adherents. Helter-Skelter investing just doesn’t work. This is not a crap game, it’s not a casino, it’s not a racetrack. There is no jackpot, but there is a pot-of-gold at the end of a long investment rainbow.
Here’s the heresy: I’ll show a plan that’s simple, safe, and historically superior, tell you exactly how to implement it, and describe its many advantages. (Heresy? Yes. You won’t find an investment advisor who would recommend my strategy: Sometimes clear logic is lost in the fog of errant established practice.)
2. FOLLOWING THE "DOCTRINE OF RELATIVE IMPoRTANCE"… PRETTY IMPORTANT.
Do be guided by the “Doctrine of Relative Importance.” The next paragraph, from an op-ed in the (“failing”?) New York Times on January 2, 2018, is not meant to be political. It is simply a classic example of common sense thinking ─ of demonstrating the relative importance of two different ideas.
“A generation ago, Republicans sought to protect President Nixon by urging the Senate Watergate committee to look at supposed wrongdoing by Democrats in previous elections. The committee chairman, Sam Ervin, a Democrat, said that would be ‘as foolish as the man who went bear hunting and stopped to chase rabbits.’”
What is the object of long-term investing? Pretty simple ─ maximum profit achieved with a rational investment strategy. (And rational deserves three underlines.) “The Doctrine of Relative Importance” shows that that the terms “risk” and “volatility”, as commonly used, are essentially diversionary. “Risk” and “Volatility” are time–related terms, and that important component of their definitions is rarely mentioned. When viewed through the prism of lifetime investing, “risk” and “volatility” become relatively insignificant and amount to no more than excuses for chronic underperformance. One phrase ─ Long-term Investment Return ─ is what must guide our thinking.
3. "DIVERSIFICATION"? MORE LIKE "DI-WORST-IFICATION."
Don’t heed the conventional definition of “diversification”. Don’t split your assets into 60% stocks and 40% bonds (where in the Torah does it say “thou must have 40% bonds?”) and then divide up the stock portion among large and small-cap companies, emerging markets , and maybe real estate and exotic stuff that goes under the name “alternatives”. I call this “di-worst-ification”: It’s a collection of assets that all but guarantees mediocre long-term returns. With conventional investing your advisor will acknowledge your returns trail an all-in stock approach, and then say “but you were protected”. Your retort: “From what, Profits?”
4. BUY INDIVIDUAL STOCKS? No individual should!
Never buy individual stocks. No stock is forever. Just ask owners of Polaroid, General Motors, or the original AT & T, all of which went bankrupt. Or look at U.S Steel, IBM, GE, Sears, AIG and Xerox, all former blue chips that have stalled.
Everyone is a bit mischievous, and this rule will be broken often, but it will be at your expense. When you stray, you pay.
5. GET SCHOOLED ON STOCK CLASSES
There are four basic stock CLASSES :
Small-cap value, (SCV)
small-cap growth,
large-cap value,
and large-cap growth.
(Because their behavior is so similar, I’ve included mid-cap with small-cap). And all stock classes are not created equal. The clear choice for all your capital is small-cap value, and, in my opinion, a sub-class of small-cap value ─ Smart Beta (SB) SCV ETFs.
This rule is so important that it merits distorting two old adages. “Don’t lose the trees for the forest.” (I know what you’re thinking ─ “what’s with this guy?” Read on.) The stock market is not an amorphous glob. Some trees in the forest outgrow the others, and SCV is the most productive grove.
Let’s put it another way. It’s not “don’t look for the needle in the haystack.” It’s “there are diamonds in the haystack, and they’re easy to find ─ they shine brightly”. My SBSCV ETFs are those diamonds.
And don’t fixate on a 0.03% ETF fee and overlook superior historic performance that carries a .30% fee.
So, do go all-in on the historically best performing stock class ─ SCV. I will recommend four small cap value ETFs, all in the Smart Beta subclass. Your advisor will tell you that’s the opposite of diversification, but she is wrong. As the following pages will remind you ad nauseam, this asset class is diversified (every industry is represented) and has outperformed for 90 years. If history is any guide, you will prosper with these long-term investments.
[Spoiler Alert: My Smart Beta Small Cap Value ETFs are EZM, PRFZ, RWJ, and EES. By the time you finish my expanded pamphlet/book you’ll be dreaming about those letters.]
6. ALWAYS HOLD 'EM — NEVER FOLD 'EM.
Don’t ever sell your SBSCV ETFs. Never! Actually, there are two choices for how long to hold them ─ forever and infinity. As I will show, there have been long periods (up to 10 years) when SCV trailed other stock classes, but those periods have always been followed by renewed SCV OUTperformance.
Wait a minute ─ let’s look at the “glass half full” scenario. Overall, SCVs have vastly outperformed the other stock classes on both a short–term and long–term basis. The few periods when they have underperformed are the exception, not the rule. The “dogmagogues” (you won’t find that word in the dictionary!) would have you choose your investments based on the ten percent of the glass that is empty ─ not the ninety percent of the glass that is full.
Who would you rather bet on, Secretariat (the greatest race horse of all time) or Mr. Ed? (For those under 70, Mr. Ed was a talking horse in a '60s TV sitcom.)
7. SECTOR ETFS? HARD PASS.
Don’t buy stock SECTOR ETFs. Remember, a stock sector represents only one industry. Buying a sector ETF is like visiting a zoo with 50 species of the same animal ─ it’s the very opposite of diversification.
8. PLAY THE LONG GAME — AND TAKE THE LONG VIEW.
Do evaluate any stock investment by the longest period for which data is available. Remember, we’re investing for a life-time. (Where did you hear that before? And you’ll hear it again ─ to your benefit). Long-term performance is the best guidance tool. Rely on data and charts from the date of inception or 10 years and compare my ETFs with others in their class. I’ll show you how. Also make comparisons with the S&P 500 (SPY), and other relevant indexes. And what could be better than comparing the four stock classes over 90 years ─ Small Cap Value and Growth and Large Cap Value and Growth. Not only is Small Cap Value the overall winner, but it has continued to outperform. (It’s ok. You can peek at the charts now.)
Smart Beta SCV ETFs have a much shorter history. The available comparison period ranges from 10 to 12 years. While, as I’ll show, they have excelled during that time, evidence of their long-term superiority is far from established.
See
9. FEES? PUH-LEASE...
Don’t pay excessive fees and commissions to brokers, investment advisers or other “experts.”
How to keep Wall Street’s hand out of your pocket? Zip it.
Remember, the most astute people with the best computer programs (and, sometimes with information not available to you) can’t even match “the market”. Your account should be with a discount broker, managed by you, and fully invested in SBSCV ETFs.
10. "MANAGED FUNDS" — NOT WORTH IT.
Don’t buy actively managed funds. They can’t beat the market over the long term, may have high management fees, and are tax inefficient. (But they do make the managers rich.)
Hedge Funds? No hedging on that — they’re an absolute No-No. Final “Jeopardy” question: Who owns the ocean-front homes? If you said “the hedge fund investors,” you lost.
11. GO ALL IN — AND THEN GO ON AUTOPILOT.
Don’t worry about rebalancing your portfolio, or asset allocation (or is it “asset dislocation”?). With this plan, there’s nothing to rebalance or reallocate. Just buy the right stuff ─ SBSCV ETFs or, at the very least, SCV ETFs, and go on autopilot. Your portfolio turnover? Anything above zero is unacceptable.
Your broker, and the securities industry live off Action ─ I recommend Stasis. (A stock buy or sell should be called a transACTION.) That’s bad news for Wall Street and Uncle Sam ─ no action and less taxes ─ but great news for your account.
And you won’t make the “big mistake” ─ there’s simply no option for choosing Madoff or Enron.
Ever wonder why all colleges don’t increase their returns by indexing their endowments? Easy answer: It’s very difficult to program yourself out of a job.
12. YOU CAN'T "TIME" THE MARKET.
Don’t try to time the market. (How’s this for banality?: If you try to “time” the market, the market will win every “time”.) History shows most investors buy high and sell low. That’s pretty simple to explain: It’s much easier to buy a rising asset and sell a falling asset. And when is high “highest” and low “lowest”? (Hint ─ Nostradomas has been dead 450 years).The best way to avoid this trap: buy when money is available. Buy high and buy low. Buy when you have dough, and hold tight. (Trite, but right). “Sell in May and go away”? I say “just stay.” Here’s my couplet: “Remember to buy in September, November, and December, AND the other nine months.”
What’s the result of not trying to outsmart the market? You will outsmart it by not “buying high, selling low”.
Could there be a better example of buying high and buying low than dividend reinvesting? Do it whenever you can. I know it robs you of your chance to analyze the market: sometimes robbery can be a positive event.
13. LET’S TRASH CASH.
Don’t keep emergency funds in savings or money market accounts. Always be fully invested. Remember, the market, over time, has an upward trajectory, and uninvested cash will only impair your performance. You can sell an ETF today and have the money in less than a week. A margin account wire transfer can give you immediate cash. Be a ruthless employer: Make all your money work for you full-time, with no vacation or sick days.
Don’t get me wrong. Obviously, I’m not advocating putting every last penny in the market. Keep reasonable dollars for living expenses available. But don’t keep the significant “cash reserve” most people advocate ─ having a “rainy day fund” will cost you some sunny days.
Of course your brokers would love to see you hold cash: they rent it out (as margin) for 5 plus percent more than they pay you.
14. SELLING SHORT: A SUREFIRE WAY TO LOSE YOUR "SHORTS".
Never sell a stock short, (i.e., never bet on a stock going down). Shorting is like choosing to swim upriver instead of gliding downstream. It also carries the possibility of unlimited losses. And remember what happens to Pacific salmon. After many years in the ocean, they swim upstream to lay their eggs: Then they die.
15. GIFTING IS A GIFT.
Do take advantage of gifting. It’s probably the most tax-efficient method of transferring family wealth. Your heirs will get more if you gift than if they inherit. But remember, a gift is a gift ─ it’s irreversible ─ and that is a potential downside you should be aware of.
Update Summer 2024: There’s much more to be said about “Gifting”. Just ask me for a copy of an article I wrote that was rejected by 3 accounting journals. FYI - none of them said the premise is wrong.
16. LET YOUR EMPLOYER WORK FOR YOU.
Do take advantage of the “financial perks” your employer may offer. Maximize contributions to retirement plans. When choosing among the retirement investment vehicles those plans offer, pick the funds or ETFs most resembling (SB) SCV ETFs.
Why don’t corporate retirement plans offer a wider choice of basic index funds and ETFs? Could it be that simple modification would increase your profits at the expense of the Wall Street advisor? Duh!
Why do most investors’ retirement accounts do better than their personal accounts? Could it be they don’t “play” with the assets in their IRAs or 401Ks?
17. “ROTH” INCREASES “WORTH”.
Do convert your existing conventional IRAs to Roth IRAs. My chapter on Roth conversions will show how “Rothing” saves you in 4 ways: Conversion rates are lower than commonly thought (my accountant thinks this is wrong but can’t tell me why ─ I’ll show you why he’s wrong and it’s right), you don’t have to take distributions starting at age 70 ½, your heirs will not pay income tax on their inherited money (but they will have to pay estate tax if your estate exceeds $11+ million ─ I hope you have that “problem”), and estate taxes ( see previous parenthesis) will be reduced by the money used to convert to a Roth.
A major bonus after these perks: After your heirs see how well your SBSCV ETFs have done, they’ll be much more inclined to follow your course. (To my Grandchildren: Picture me with my right thumb upright and my hand slowly going up and down).
Update Summer 2024: The article suggested in rule 15 also shows how Rothing is almost always a great idea.
18. INVEST AT HOME SO YOU CAN TRAVEL ABROAD.
Do confine your investing to the U.S.A. Stay home. Over time, U.S. markets outperform both emerging markets and other industrialized countries. Act like a passport is needed to buy in foreign markets, and yours has expired.
19. NEVER BUY A BOND.
Reminder: See updates for 1 important new recommendation: QQQs should be a significant part of your portfolio.
Do trade in your liquid investments (mutual funds, bonds, individual stocks, etc.) for my SBSCV ETFs. That advice apples to both taxable and retirement assets. Remind yourself ─ you are investing for DECADES, NOT DAYS.
Caveat: This rule may vary depending on age and net worth. These ideas are best suited for young investors (under 55) or older investors with ample resources. Retirees, or near-retirees with limited assets might put a portion of their savings in Smart Beta Small Cap Value ETFs and enlist an investment advisor for help in choosing more stable income producing vehicles. Unfortunately, when both assets and life-expectancy are limited, the “life-time investing” strategy I advocate is not a viable option.
No bonds? ─ That’s heresy worthy of the death penalty. Not to worry ─ I plan to duck when the guillotine comes down.
[I know rule 19 is more rule 5 ─ just couldn’t resist another pitch.]
20. RELAX... AND LET THE TWIN ENGINES OF SMART BETA SMALL CAP VALUE & COMPOUND INTEREST FLY YOU TO WEALTH.
And, best of all ─ Don’t worry about losing. Buying and holding any broad stock index will be profitable over time. This is a horse race where all the horses win. The variable is the size of the payouts, and SCV has led the pack for 90 years. Smart Beta SCV? Twelve years so far, and the bet keeps looking better.
You're right. In reading this for the umpteenth time, it does sound too good — and too simple — to be true. But... I'm living it, and it works!
Still don’t believe me? The charts don’t lie!
Later Updates: Spring 2021 & Winter 2024