Twenty years ago, I created The Coffeehouse Investor and authored a book by the same name to help investors build wealth, ignore Wall Street, and get on with their lives.
The book was published during a red-hot stock market driven by the dot-com boom, when it seemed like everyone (except me) was doubling their money overnight in companies driven by the growth of technology and communications.
Encouraging investors to turn away from the frothy returns of dot-com companies and invest instead in broad-based index funds was a mighty challenge, and for the most part, fell on deaf ears while the NASDAQ Composite index continued to climb higher and higher. But the glamour of empty promises and profits couldn’t last, and within four years, the NASDAQ index had plummeted by 78 percent.
During this debacle, investors slowly started to turn away from the empty profits and promises of the dot-com era and began to focus on the common sense of three simple principles found within The Coffeehouse Investor book.
As 2019 comes to a close, it is a good time to review the benefits of these three principles, and why they are more important than ever before in guiding you toward financial security during your retirement years.
1. Don’t put all your eggs in one basket — diversify your portfolio.
In the “good old days,” if the stock market was too volatile for your liking, you could turn to the safety of 6 percent CDs and get on with your life. That is no longer the case. Creating a diversified portfolio between stocks and bonds that matches your need for growth and security is more important than ever before for one overriding reason: The yield on bonds and other fixed-income investments is at historical lows and will quite possibly stay low for our lifetime.
2. There’s no such thing as a free lunch — capture market returns through low-cost index funds.
When the stock market generates an annualized return of 18 percent, as it did during the 16-year stretch from 1983 through 1999, or a 16 percent annualized return, as it has done over the past 10 years, you can make a lot of investing mistakes and still come out ahead. What are your expectations for returns over the next 16 years? Based on current dividend yields, if you are using anything over 8 percent, be prepared to be disappointed. More than likely, at current valuations, annualized returns of 6 percent are more probable. Investment mistakes made in this environment will be emotionally and financially painful and likely will wreak havoc on your plans for a secure retirement.
3. Save for a rainy day — create your personal financial plan.
Building a simple and smart financial plan that incorporates lower expected returns, with a detailed attention to saving (while working) and spending (during retirement), will allow you to ignore the stock market and focus on what matters most of all. Creating clarity with these components of your planning allows you the emotional freedom to make future financial decisions based not on what the stock market does in the coming year, but on the personal decisions you make in your everyday life.
Coffeehouse Investors want to be in control of their financial destiny. Following these three principles will allow you to do the same.