BJM’s Golden Investment Guide

One of my majors in undergrad was finance, but that doesn’t mean much at all. Like many subjects in college, majoring in it does not guarantee proficiency. Nevertheless, I did learn a little bit and some of that bit is expressed in this Excel file, which I encourage you to download even if you only intend on investing in the future. The bulk of the information in this post is contained in the Excel file. Be sure to see that there are multiple tabs at the bottom of the file: Brokers, Main, Good Sites & Concepts.

The basic philosophy behind my suggestions is that it is better to primarily own stocks, especially when young, than it is to own bonds or to gain comparatively small rates of interest in the bank. The post-WWII average annual rate of return in the U.S. stock market is about 11.6%. Other instruments like CDs tie your money up, in other words, they have poor liquidity. However, it is difficult to own individual stocks because to invest efficiently you must do frequent research on each stock and individual stocks expose you to idiosyncratic risk. In addition, individual stocks can simply cause you sleepless night if you have a large portion of your savings invested in them. The next best option is to buy mutual funds which allow you to diversify across many companies, industries & countries, thereby virtually eliminating idiosyncratic risk and leaving you with only market risk, which is impossible to eliminate. If you ever buy a mutual fund, never buy a “load fund.” Even with mutual funds, data shows that professional fund managers consistently fail to outperform the S&P 500 (the 500 largest publicly traded companies in the U.S.) when fees are accounted for.

However, there is yet a better alternative to mutual funds: Exchange Traded Funds (ETFs). ETFs are a relatively new instrument with rising popularity because they are more cost efficient than mutual funds but grant the same benefits and options.

As you can see from the Excel file, I like the idea of investing significantly in politically stable overseas countries. You can expect higher rates of growth in foreign countries because of what the Solow Growth Model tells us, which is basically that developing countries grow at faster rates than developed countries. There are also at least two phenomenons in the investing world: (1) Small capitalization stocks outperform large capitalization stocks in the long run, and (2) Value stocks outperform growth stocks in the long run. If you follow my model of investing primarily in ETFs, it is also important to pay attention to macro-fluctuations in the U.S. and world economies.

The suggestions I have made assume a long-term investment strategy, which I believe is the most effective type. As a disclaimer, I have never invested a single dollar of my own money (mainly because I don’t have any of my own money) and I’m very good at sounding like I know what I’m talking about. Take this post and attached Excel file as inspiration and as a general framework to getting you thinking about finance, a subject that even my highly educated friends tend to ignore.

As always, I invite cruel and indecent public criticism.