If you read my column last week, you might have concluded that my investment portfolio is a mess. By my own admission, I hold too much company stock and too much cash, and I don’t have anything close to the recommended allowance of bonds for a person my age. And while I often write about tax matters and understand the tax code pretty well, my record on curbing taxes hasn’t been perfect. I’ve held tax-inefficient funds in a taxable account and have been slow to move money into IRAs each year. Inertia (laziness, sloth, whatever you want to call it) has been the major factor behind almost all of these problem spots.
But you know what? Despite these missteps, my husband and I have managed to do just fine from a big-picture standpoint; our financial plan is well in hand. Here’s what has worked for us, as well as my most unscientific assessment of whether the successes resulted more from luck or skill.
We Maintained a High Savings Rate
Just as an all-black wardrobe can conceal unwanted holiday pounds, so can a high savings rate cover up a multitude of investment sins. So when I think about what has worked for us from an investment standpoint, over the long haul, a high savings rate has to be at the top of the pyramid. Luck played a starring role in our ability to save: My husband and I had the good fortune of emerging from college debt-free, which enabled us to buy a house and start saving for retirement early in our careers. We’ve also both been employed for three-plus decades, meaning that we’ve been able to steadily sock away a good share of our incomes and benefit from employer-matching contributions, tax-deferred growth, and a long runway of investment compounding. I have previously mentioned that we don’t have a budget, but automating our investment contributions—not just into our company retirement plans but into our taxable account as well—has helped us be disciplined about saving in good markets and bad. That’s not to say we haven’t made sacrifices, especially earlier in our careers. We spent many a weekend working on our old house when we were just starting out, and I’ve always taken my husband’s hand-me-down cars and driven them for a long time. The home renovations were fun—mostly!—and I’m not into cars so it’s a stretch to call either of those things a big sacrifice.
Luck vs. Skill Ratio: 30% luck/70% skill
Stocks Delivered
We’ve also lucked out in terms of market performance during our years of investing. There have been some bad spots: 2000-02 and 2007-09, to name the biggies. But over our 35-year horizon thus far, stocks have returned about 11% on an annualized basis. That’s a fabulous rate of return by any measure and one that we fully benefited from thanks to an equity-heavy posture throughout the period. Of course, stock market returns over any specific time horizon are mainly luck of the draw, but I’m giving us a few skill points here, too. While I haven’t calculated an internal rate of return for our investments over our entire time horizon, I know that we haven’t pulled back from stocks during times of market duress. We’ve kept on investing and even added extra to them, above and beyond our automatic contributions, when we’ve had extra cash on hand during such periods. It has helped that we’re too busy to think much about our investments, and intellectually we understand that stocks invariably shake off their periodic swoons.
Luck vs. Skill Ratio: 80% luck/20% skill
We Curbed Investment Costs
Limiting investment costs has been another important tailwind, one that enabled us to “receive our fair share of the market’s returns.” (I can never write those words without hearing Jack Bogle’s booming baritone in my ears.) I quickly got religion on the importance of limiting costs shortly after starting at Morningstar in 1993. The first investing book I read in my new job was Burton Malkiel’s “A Random Walk Down Wall Street,” which makes a compelling case for low-cost passive investing. And as an analyst, I learned that expense ratios were much more predictive of a fund’s future prospects than its past returns. Morningstar’s 401(k) investment menu skews toward low-cost investments, too, and my husband and I gravitated to cheap funds for the rest of our portfolio. It’s hard to know where luck ends and skill begins with this one, so I’m calling it a draw.
Luck vs. Skill Ratio: 50% luck/50% skill
We Kept It “Basic”
Just last week I learned that my taste in all sorts of things (Lululemon, avocado toast) is what the kids might call “basic.” And my preferences in the realm of investing products are most definitely basic, too. I’ll admit that we got off to an inauspicious start on this front: Our very first non-401(k) investment was the niche-y and high-cost Templeton Developing Markets TEDMX, the result of me attending an early Morningstar Investment Conference and enthusiastically trusting the long-term prospects for emerging markets. We also dabbled in individual stocks early on, in that period in the late 1990s when everyone seemed to be opening a brokerage account. But our portfolio was largely anchored in core stock funds from the start. I had become an avid reader of Bogle, Jason Zweig, Bill Bernstein, and Jonathan Clements, all of whom enthused about the virtues of a minimalist, low-cost investing approach. My own cynicism about the investment industry grew, too, as I observed the all-too-familiar pattern of firms launching products only after an asset class had enjoyed a strong runup in the market. While we have steadfastly maintained a healthy allocation to non-U.S. stocks, which has certainly held back our results relative to a U.S. 60/40 allocation, that’s about as exotic as it gets for us. Just as important is what we’ve avoided: We haven’t bitten on alternative investment products, cryptocurrency, thematic funds, or any number of other investment fads that have come and gone over the years. I haven’t run the numbers, but I know ignoring the fads has redounded to the benefit of our long-term results.
Luck vs. Skill Ratio: 20% luck/80% skill
