Thursday, November 12, 2015

Using the KISS Method as the Best Way to Save and Invest for the Long Term

The keep it simple, stupid (KISS) method of investing is a simple and easy way for individual savers and investors to realize long term financial security.

It's sometimes boring, but if followed it will definitely prove to be successful over time. The key words are earn, save, blue chip stocks, diversify, simple, debt minimization and a long time. Getting to simple requires a basic understanding of how markets work, but it doesn't require detailed knowledge about individual companies or stocks. Given some savings and a sufficient level of interest, becoming a successful long term individual saver and investor is not difficult. It's simple.

When it comes to investing, it pays to keep it simple has this advice for the wary:

"Simple, transparent portfolios have served investors well for decades. But somehow, this wasn't good enough. In recent years investors have fallen prey to the seductive siren call of what I call "short-term-ism" – the idea that short-term portfolio tinkering is necessary to achieve long-term financial goals.

In the short term, capital markets can be volatile and don't always appear to reflect rational or efficient pricing. Although the impact of short-term volatility fades over time, few investors suffering from short-termism respond well to market volatility. Typically they adopt various market-timing strategies in an attempt to outsmart the market. Sadly, this wealth-destroying malady is often encouraged and enabled by account-churning financial advisors. Inevitably, these investors find themselves paying higher fees, higher taxes and receiving lower returns....

The passive, simple and transparent approach to investing is no longer mainstream. Investors have been encouraged to embrace strategies that emphasize overactive management, complex investment products, stock picking, manager chasing and market timing. . . . Hopefully, you've avoided being seduced by the hype surrounding these products.

Today, active management is the centerpiece of all "sophisticated" investment strategies .... Since most active managers underperform their benchmark index, adding managers to your portfolio increases the likelihood that your portfolio will underperform a passive, simple, transparent portfolio. A financial advisor who claims to be acting in a fiduciary capacity with clients who promotes active management is, in my opinion, failing to act in his clients' best interests.

The world is complex and unpredictable but this is nothing new. It doesn't mean you need an overactive investment strategy and opaque investments to meet your financial goals. The number of an investment's potential failure points is proportional to its complexity. If you don't fully understand how an investment is supposed to work its magic, you don't know what its potential failure points are. . . .

Risk means different things to different people. The investment industry and academia equate risk with volatility. But I think most investors equate risk with uncertainty, which makes them easy marks for investments that promise to yield the stock market's upside and protect them from its downside. Unfortunately, the hype for such products has exceeded the results. The best defense against uncertainty is understanding what you own, why you own it and to review your portfolio on an annual basis to see if you're still on course to achieving your financial goals. This is why having a written financial plan that addresses your goals, time horizon and risk tolerance is so vital.

The stock market slowly transfers wealth from short-term speculators to long-term investors. I believe that owning a passive, simple and transparent diversified portfolio continues to be the best strategy for long-term wealth accumulation. The performance of Wall Street's overactive active managers hasn't lived up to their promises. The strategy of keeping it simple has proven its value for decades and survived many geopolitical and economic stress tests while pretenders to its throne continue to fall by the wayside."

Summing Up

By a wide margin, investing in blue chip stocks will outperform investments in other assets over time.

And as interest rates rise appreciably from their current historically low levels (which they inevitably will at some point), fixed income investing will become even less attractive. {NOTE: That's because the principal value of bonds decreases as interest rates increase.}

Over the long haul, following the KISS approach to saving and investing is the clear route to debt minimization and lasting financial security.

So why act out of emotions and make complicated that which can be made so simple?

And why give away our hard earned money through debt accumulation and debt service?

Why not instead use that otherwise 'debt servicing' money to achieve financial security and independence?

Getting to simple is essential when it comes to successful borrowing, saving and individual investing.

That's my take.

Thanks. Bob.

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